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California IOU’s – Again?

August 23, 2010 By Chuck 1 Comment

California is at it again.

California lawmakers passed a bill to let recipients use state IOUs to pay fees and taxes owed to the government in Sacramento, if the warrants are issued.

The bill, from Assemblyman Joel Anderson, a San Diego Republican, passed the Senate unanimously. It requires all state agencies to accept registered warrants issued to pay for goods and services. The Assembly unanimously approved the measure in September. The Senate vote puts the legislation before Governor Arnold Schwarzenegger, whose budget aides oppose it.

California may start handing out warrants to pay some bills within two weeks to conserve cash, Controller John Chiang, a Democrat, has said. The need for the IOUs arose because a legislative logjam over how to erase a $19 billion deficit has prevented passage of a budget. The state will use the chits for everything from supplies to contracted services and health-care costs so it can make payments on priority items such as bonds.

The legislation is aimed at offsetting the hardship IOUs can impose on those who receive them, Anderson said, citing the experiences some recipients had with last year’s warrants.

The state, with the world’s eighth-largest economy, issued $2.6 billion of IOUs last year after a similar budget stalemate. That was only the second time since the Great Depression that California had to use warrants to cover costs and conserve cash {…} (Bloomberg)

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California May Resort To Making Payments with IOU’s – Again

August 12, 2010 By Chuck Leave a Comment

California is a state that is essentially borrowing from one credit card to pay another. For close to two years California has had to resort to making payments with IOUs, including tax payers who had a refund owed to them.

Here we go again…

State Controller John Chiang said Tuesday that without a state budget, California’s government would be unable to pay its bills in late August (or maybe early September). That means issuing IOUs to some people. Possible dates for IOUs could be either Aug. 27 or Aug. 31, when big payments to schools are due, according to this schedule on the controller’s website.

This announcement, in the upside down world of California’s badly broken budget politics, felt almost like good news. With lawmakers and the governor making little progress on the budget — and showing little interest in making that little progress — the threat of IOUs seemed to provide hope that there’s a deadline out there, somewhere in the near future, that might force these guys to pass a budget.

Or maybe it won’t. Democratic legislative leaders and Gov. Schwarzenegger have all raised the possibility that there may not be a budget agreement this summer — or even this fall — if their demands aren’t met. Given the intransigence, maybe the controller should try issuing IOUs sooner rather than later, as a test of whether a failure to pay the state’s bills might be a spur to real budget action. (NBC_LA)

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California Budget Crisis – IOU’s Again?

January 22, 2010 By Chuck

The California budget is in a ‘precarious’ condition. Once again California is bleeding money, and there are not enough band aids to control the bleeding.

California Controller John Chiang has stated that the state may have to issue IOUs for the second time in as many years. California has a $20 Billion budget deficit.

“If solutions are slow to emerge and if they are neither credible nor sustainable, California will once again be unable to timely meet all of its payment obligations and my office will be forced to seek costly emergency financing, or conserve cash by delaying payments or issuing IOUs,” Chiang wrote.

The state issued $2.6 billion of the vouchers last year to pay bills, resorting to promissory notes instead of cash for the second time since the Great Depression as Schwarzenegger and the Legislature were deadlocked over how to close an imbalance that totaled $26 billion at the time. The tactic allowed it to preserve cash for the highest-priority bills, including payments to bondholders, until an accord was reached and the state was able to sell debt to generate funds. […] (Bloomberg)

When California issued IOUs last year it created more hardship for small businesses and residents who were already hurting for cash. If California repeats the same IOU program we can expect to see a trickle down effect of more small business failures and an increase in delinquency rates in all forms of credit products, including mortgage payments.

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Tax Refunds In California – IOU’s Again?

January 13, 2010 By Chuck

Remember last year when California was so cash poor they had to issue IOU’s instead of actual payments. (See December 31, 2008 post “tax refunds in California may be IOU’s”).

Well now it is Déjà vu again.

California is facing yet another cash crunch this year, and on top of that their debt rating was just cut to A- over the deepening budget situation.

Standard & Poor’s on Wednesday cut its rating on California’s $64 billion in general-obligation debt to A-minus from A and warned that the outlook was "negative," meaning another reduction could loom.

S&P cited new concerns about the state’s finances, including a possible cash shortage "if the state’s revenue and spending trajectories continue."

Scrambling to close a $20-billion budget gap, Gov. Arnold Schwarzenegger has proposed a number of one-time fixes — including having the federal government contribute nearly $7 billion in new aid. Yet the state’s chief budget analyst believes the odds of getting that much help from the U.S. are "almost nonexistent."

S&P worries that the state could face a cash crunch in March, before it receives the income tax payments due in April.

"There could be days in March when they go into a negative cash position," said Gabriel Petek, an S&P analyst in San Francisco.

Although Petek said he didn’t believe California would be in jeopardy of missing any payments due on its debt, he said the government might again pay other obligations with IOUs, or the state might again require a short-term loan from Wall Street.(Source: LA Times)

This sounds very similar to the situation one year ago, although this time the credit rating has deteriorated, and so to has the fiscal outlook for California. I sure would hate to be expecting a tax refund in California this year (again).

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California IOUs – Banks Will Stop Accepting This Friday

July 7, 2009 By Chuck

Well if California residents don’t have enough problems already. Now the IOUs that the state government has been issuing as payment will no longer be accepted by major banks starting this Friday.

A group of the biggest U.S. banks said they would stop accepting California’s IOUs on Friday, adding pressure on the state to close its $26.3 billion annual budget gap.

he development is the latest twist in California’s struggle to deal with the effects of the recession. After state leaders failed to agree on budget solutions last week, California began issuing IOUs — or “individual registered warrants” — to hundreds of thousands of creditors. State Controller John Chiang said that without IOUs, California would run out of cash by July’s end.

But now, if California continues to issue the IOUs, creditors will be forced to hold on to them until they mature on Oct. 2, or find other banks to honor them. When the IOUs mature, holders will be paid back directly by the state at an annual 3.75% interest rate. Some banks might also work with creditors to come up with an interim solution, such as extending them a line of credit, said Beth Mills, a California Bankers Association spokeswoman.[...]

The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment. California plans to issue more than $3 billion of IOUs in July.[...] (Source: WSJ)

What a disgrace, fist these super ‘too big to fail’ financial institutions get bailed out with tax payer funds and then turn around and stiff the public.

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California IOU’s

July 7, 2009 By Chuck

california IOU

Look Honey, We got our tax refund!

Look Honey, We got our tax refund!

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California Credit Rating Cut Again

July 6, 2009 By Chuck

Now that California is issuing IOU’s as payment Fitch Ratings has cut the credit worthiness to BBB – two notches above ‘junk status’.

Further downgrades are possible, Fitch said, if legislators and Arnold Schwarzenegger, governor, do not end a stalemate over how to close a $26bn budget gap. “This underscores the urgency to solve our entire deficit,” Mr Schwarzenegger said.

By issuing the IOUs for what is considered non-priority payments, including vendor bills and tax refunds, the state is taking steps to ensure debt service on California’s nearly $70bn in general obligations bonds, Douglas Offerman, an analyst at Fitch, said.[...]

The use of IOUs for non-priority payments would offset cash shortfalls into September 2009, as currently projected, Fitch said. But by the end of October the projected cash deficit expands to $16bn, beyond non-priority spending of $10.6bn, excluding tax refunds. The rating, which is four notches below that by Fitch for any other state, is Fitch’s second cut for California in the past few weeks. At the previous single A minus, California already had Fitch’s lowest rating. It is rated at single A level by Moody’s Investors Service and Standard & Poor’s.

Tom Dresslar, spokesman for California state treasurer Bill Lockyer, said: “It is hardly surprising; nevertheless, it is always disappointing, especially for a state that is already at the bottom of the ladder when it comes to credit ratings.”

He added: “The folks who will pay the price are tax-papers when we go to market to sell infrastructure bonds. It will cost taxpayers more money to build their schools, roads, levies, affordable housing.”

California bonds began weakening late in the day. Long-term debt has been yielding just over 6 per cent, about a full percentage point more than other state bonds.[...] (Source: Financial Times)

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It’s IOU For California Contractors And Residents

July 2, 2009 By Chuck

California is now in crisis mode with little cash on hand. Contractors and individuals who are still waiting for tax refunds will instead an IOU.

Update: The following chart from reuters

california IOU chart

With budget negotiators at loggerheads and California government facing a cash crisis, the state controller’s office will start printing IOUs this afternoon for the first time in 17 years.

The presses are set to start at 2 p.m., churning out 28,742 IOUs worth $53.3 million that will be dispatched mostly to residents throughout the state still awaiting their income-tax refunds.

State finance officials set the interest rate at 3.75% for banks that accept the vouchers. Nearly 29,000 IOUsth $53.3 million will be sent, mostly to residents awaiting tax refunds. wor

Reporting from Sacramento — With budget negotiators at loggerheads and California government facing a cash crisis, the state controller’s office will start printing IOUs this afternoon for the first time in 17 years.The presses are set to start at 2 p.m., churning out 28,742 IOUs worth $53.3 million that will be dispatched mostly to residents throughout the state still awaiting their income-tax refunds.

A panel of state finance officials this morning set the interest rate for the IOUs at 3.75% for banks and other financial institutions that are willing to accept the scrip. Some banks have already agreed to honor the paper, including Bank of America and Wells Fargo, which will do so until July 10. Some have not made a decision. Recipients who don’t have a bank that will cash them can redeem them Oct. 2.Wells Fargo’s agreement came with a nudge. “We are reluctant to take this step, but are doing so to help our customers who are not at fault and with the expectation that the Legislature and governor will complete the budget within days,” Lisa Stevens, a bank official in California, said in a statement.

The state’s three-member finance panel voted 2-1 to set the interest rate, with the governor’s representative on the board objecting, proposing instead a 1.5% rate, with a redemption date of June 2010.[...] (source: LA Times)

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