Broke California To Issue IOUs To Businesses

Broke California To Issue IOUs To Businesses


They’re seeing red in the Golden state.

From Reuters:

California’s controller said on Wednesday that he would have to issue IOUs in a week if lawmakers can’t quickly solve a $24 billion budget deficit, and the state’s treasurer plans to tap a reserve fund to meet debt service costs.

The measures came as a budget crisis deepened in the most populous U.S. state and the gridlocked legislature failed to pass a proposed $11 billion in cuts.

Why the gridlock? Because Dems want to makes cuts and raise taxes and Republicans won’t let them. They say that massive cuts need to be made, and that’s fair politically, but we’re getting into some pretty dire territory at this point and I don’t see how cutting health care and school funding is going to help California in the long run.

But back to the IOU situation…

“Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state’s bills beginning on July 2.

“The state’s $2.8 billion cash shortage in July grows to $6.5 billion in September and after that we see a double digit freefall,” Chiang said. “Unfortunately, the state’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses.”

They say they plan to solve some part of it by issuing bonds, but that’s not as surefire as it once was since rating agencies may downgrade them.

No easy answers in this debate, but that’s where we’re at right now.

More as it develops…

  • kranky kritter

    To reach balance, you either raise revenue (primarily by raising taxes and fees) or you cut expenditures. All adults have to face this. Really no room for argument.

    Further, there is really not much room for argument when it comes to the drawbacks of each approach.

    • Increasing taxes and fees increases individual financial burdens at a time when most folks are more pinched than they were a year or so ago. They decrease purchasing power and place further drag on the economy.

    •Cutting the budget places additional strain on whichever folks receive fewer services and government support, and it puts greater strain on gov’t employees, both those laid off and those remaining.

    And that, folks, is called a conundrum. All that there is to do is face that fact and then choice option a, option b, or some balance.

    I don’t see how cutting health care and school funding is going to help California in the long run.

    The hard truth is that when any entity has a gross imbalance between income and expenditures, the first thing that helps that entity in the long run is facing reality. Everyone wants good education and healthcare. But unfortunately, and to be glib, deserve’s got nothing to do with it. The entire nation faces the same conundrum under current circumstances, and the conundrum can only be resolved by taking at least a small step back from our belief that we should all have what want and deserve, and bring our desires into line with what we can afford as a family, as a town, as a state, and as a nation.

  • Paul

    America is in trouble : The economy, two wars, philandering politicians, crumbling infrastructure, partisan politics. We are trying to stop arterial bleeding with band aids !!

  • rob

    Cutting Healthcare and Schools is a sham.

    Look if you think the republicans are blocking tax increases, then you don’t know much about CA politics.

    Our republicans are not fiscal conservatives, but they don’t want to get booted out of office for not acting on the philosophy they promised to follow (cut spending, lower taxes).

    So in order to get these tax increases passed, they need cover. Arnold is giving it to them by saying we have to drastically cut healthcare and schools.

    Perhaps you recognize the age old sales trick at work: Splat ’em up against the ceiling, so that you can scrape them down.

    Dems craft the tax hikes, Arnold provides put fear into the voters, a few termed out republicans help the dems make the vote, and the rest of the Republicans rail against it (grateful that it’ll pass so they don’t have to make hard choices).

    The unions and lobbyists go home happy, the rats keep their jobs, and the populace is none the wiser. Ba-da-bing ba-da-boom.

  • wj

    In other circumstances, things would be resolved in a fairly straightforward manner: whichever position commanded a majority in the elected Legislature would do things their way. Which might not be the best possible way, but at least would get something done. If people didn’t like it, they could always elect different people next year to do things differently.

    But California doesn’t have that option. Here, a requirement for a 2/3 majority to raise any taxes is in place — and cannot be changed by the Legislature. The folks who do not want to raise any taxes have more than 1/3 of the votes in the Legislature, so they can stop that forever. But they do not have a majority, so they cannot cut any spending — always assuming that they have a list of proposed cuts which would balance the budget, which they do not seem to.

    So some cuts will get made. But not enough to balance the budget. I will be unsurprised to see us having a measure (or several) on the ballot in November to finally rationalize this. Maybe get rid of the 2/3 requirement for tax increases. Maybe a recall of everybody currently in the Legislature. Maybe detailed budgeting done by the voters (which sounds, and would be, a horrible mess…but in keeping with California practice these past several decades). Maybe something else. But the “normal” dysfunctional state of the Legislature is being put out in public where nobody can miss it. So perhaps, just perhaps, something will get fixed.

  • kranky kritter

    When did this “no tax hikes w/o a 2/3 vote” get passed? Was it a referendum?

    Boy those chickens are coming home to roost like a motherf__ker.

    I have so little sympathy for California given how much they increased the state budget during the good years. They were ground zero in the real estate bubble, too.

  • Tully

    Constitutional amendment referendum, back in the ’80s. IIRC.

    They’ve already got some of the highest state taxes in the nation, and near the highest out-migration of taxpayers. You’d think someone would get the hint.

  • rob

    We also have Prop 13 to limit increases to property taxes to Market or 2% annually whichever is least.

    There’s talk of a split roll, such that residences are protected by prop 13, but not commercial properties. Honestly Prop 13 should only have been extended to primary residences, not investment properties or commercial properties where the owner charges the same market rent as every other landlord, but pockets the difference.

  • kranky kritter

    Rob, I am happy to say that 2/3 seems liek too high a bar, but here’s the thing though. How do you limit gov’t growth without some sorts of mechanisms like this? I really think you don’t have to be a conservative or a republican ( I for example am neither) to know that government likes to get bigger, and that it tends to waste money because it only ever adds, never subtracts.

    Across the nation, in governments and in the private sector, we built a castle of promises (in other words future liabilities) on the now quite obviously mistaken belief that the stock market and real estate values could keep merrily growing just as they had for the last decade or so.

    California does not have the revenue to keep all the promises it has made, and they aren’t going to be able to just tax their way out of it. People will bail. Especially the smart and the wealthy. Even gov’t employees will move when they retire to go live on pensions California can’t afford to pay them.

  • rob

    If government officials were responsible individuals, that put the welfare of their constituents and their state/nation above their own self-interest and had the capacity (and the interest) to seriously consider the long view, then I would agree that the 2/3rds bar would be too high.

    As it stands that bar is the only thing slowing down how quickly our elected can sell us down the river.

  • wj

    I have limited sympathy for those whose whole approach to this situation is to scream “No Tax Increases!” But the other side is not all that honest either. If ever there was a political group that deserved “A pox on both your houses!” California’s politicians are right there.

    A little thought experiment may be enlightening. In the middle of the last century, taxes in California were high, but hardly crippling. And we managed to
    a) build a school system for all the baby boomers
    b) create a state university system which was one of (if not the) finest in the world,
    c) create a state college and community college system to go with it,
    d) build an enormous highway system around the state,
    e) build a state-wide water transport system (whatever its merits, the California Water Project was not cheap),
    f) provide a system of hospitals for the mentally ill.

    Today, we are not building any of the first five. Indeed, we are not doing all that well maintaining what we have. And the mental hospitals were long since closed down completely (replaced by “community care” . . . which was never funded and never happened). So one might reasonably ask: where does all the money go now? An intelligent politician looking for economies might run a comparison — not because everything new is bad, but just to get some perspective.

    Yet if anybody has done a budget comparison, it sure hasn’t gotten any publicity. My personal bet is that the big growth areas have huge constituencies which don’t want to know. Like the prison guards’ union, which grew due to the war on drugs and draconian punishments. Like early and generous retirements for state workers. Etc. But I admit that I haven’t broken loose the time to run the comparison either.