LOS ANGELES — Its budget gap growing and its political process for addressing the gap unhinged, California will begin Thursday to pay vendors and taxpayers with i.o.u.’s, only the second time the state has adopted the emergency payment method since the Great Depression.
By Thursday afternoon, state officials said, 28,742 warrants worth $53.3 million will be printed and readied for distribution. If the state’s fiscal crisis – which has left California unable to pay all of its bills – continues without a budget settlement, it would issue as much as $3.36 billion for the month of July.
The bulk of the warrants – which will offer recipients an interest rate of 3.75 percent -- will be issued to Californians waiting for their income tax refunds, though some will be issued to local governments as well as to vendors doing business with the state. Federal and state laws prohibit paying state employees, schools, or Medicaid recipients with the warrants. The issuance of i.o.u.’s comes after state lawmakers and Gov. Arnold Schwarzenegger failed to agree on how to close a state budget hole — now roughly $27 billion — by the end of the fiscal year on Wednesday. The state is essentially too short on cash to pay its bills, and will continue to issue warrants — with potential long-term serious damage to the state’s credit rating — until the budget impasse is resolved.
In the meantime, Mr. Schwarzenegger, a Republican, has ordered state workers to take a third furlough day each month, beginning next Friday, to help stave off a further cash crisis in the state. On Wednesday, he proclaimed a fiscal emergency and called for a special session to continue the budget debate.
A union representing engineers immediately filed a lawsuit protesting the third furlough day. “Telling people to stay home a third day a month slows economic recovery,” Mark Sheahan, of the Professional Engineers in California, said in a statement announcing the lawsuit. Vendors and state residents who receive warrants may take them to a bank or credit union that accepts them for cash, or hold on to them until their maturity date — which will probably be sometime in October — and get their cash plus the accrued interest.
On Thursday, a small handful of banks – including Bank of America, Wells Fargo and Chase -- indicated that they would accept the warrants, but only through the middle of the month. The state’s trade association offered less-than-overwhelming optimism that more banks would step up, citing the technical difficulties in managing the IOUs coupled with fear of getting paid out in early October, when the warrants are set to mature.
“In evaluating potential registered warrant acceptance, banks have been advised by regulatory authorities to consider such issues as credit quality, capital requirements and concentration limits,” the president of the California Bankers Association, Rod Brown, said in a prepared statement. “Given the poor credit rating of California – the worst in the nation – banks may be hesitant to extend credit to the state.”
Democrats in the State Legislature tried unsuccessfully to stave off the need for the warrants through piece-meal budget cutting earlier in the week that was blocked by Republican lawmakers.
The Democrats, who are in the majority in both houses of the legislature, are at bitter war with Governor Schwarzenegger, who has said he will sign no budget legislation that does not close the entire budget gap and include several significant policy changes that will have an impact on future budgets. The governor’s failure to sign off on legislation earlier in the week that would have reduced payments to schools and thereby pushed off the need for IOUs was met with rage by State Senator Darrell Steinberg, the president pro tem, who called it “without question the most irresponsible act I’ve seen in my 15 years of public service.”
The governor held his first of two planned news conference in Southern California here Thursday to denounce the lawmakers, whom he has already taken to task in every possible media — television, video and Twitter feed — for mulling, in one instance, changes to a law concerning the tail of cows while the budget stalemate continued. He also promoted several policy initiatives, including some that are sure to run afoul of public employee unions, which have historically been aligned with Democrats.
“I presented my proposal and asked the legislature to make the tough decisions that are necessary and to make the real tough and deep cuts,” Mr. Schwarzenegger said during his news conference in Los Angeles. He added: “Instead of negotiating and coming to a budget agreement, they decided to debate and to debate and to have hearings and more debates and more hearings and finger-pointing and assigning blame. At the end of the day, they haven’t accomplished anything.”
Tags: Darrell Steinberg, Schwarzenegger, California politics, California budget, Twitter, Bank of America, Wells Fargo, Chase, Professional Engineers in California, State legislature, Warrants, IOU’s, budget gap, the great depression,