California Budget Crisis – IOU’s Again?
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.
Tax Refunds In California – IOU’s Again?
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).
It’s IOU For California Contractors And Residents
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

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.
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)
California Can’t Pay Their Bills – To Issue IOU’s
The state of California is teetering on the brink of insolvency. Today the California state Senate failed to approve measures designed to close a massive deficit.
The Senate failed to approve the first of about 20 bills that calls for cutting spending by $11.4 billion through June 2010. The Assembly turned down the bill on a first vote but left open the option to continue voting on it today.
State Controller John Chiang, meanwhile, warned today that he will begin issuing IOU’s next week to local governments, private contractors, state vendors and to taxpayers waiting on tax refunds – unless the Legislature passes a solution quickly.
The bill is part of about 20 bills that make up the package of solutions proposed by Democrats to help close a $24.3 billion deficit.
The votes in both houses failed largely along party lines. Republicans have said they would not support any part of the Democratic plan because, they argued, the proposed cuts were not deep enough and the package includes $2 billion in new taxes.
But today’s votes involved only the bill on spending cuts – not on tax hikes.[...]
Chiang said he will start sending IOUs beginning July 2.
“Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” Chiang said. “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. Unfortunately, the State’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses.” (source: SFGATE)
And a breaking news item that came over the wires moments ago:
(US) California state govt plans to tap reserve fund again to meet debt service costs, to file material event notice for bondholders on Thursday
Ouch! A material event notice to bondholders, that won’t go over well.
And one other stab in the back to California today:
Sphere: Related ContentS&P places California economic recovery sales tax bonds on credit watch negative
CreditWatch with negative implications following Standard & Poor’’s receipt of information from the state that it intends to make a draw on its reserve coverage account July 1 due to declines in sales tax receipts and a further draw next January. Standard & Poor’’s will review the state’’s economic recovery bond (ERB) ratings after further evaluation of state projections as to the size and timing of potential draws on the ERBs” reserves.
Are You Expecting A California Tax Refund – Don’t Count On It
From the Office of the California State Controller’s own web site we find this…
This is directly from their own web site.
California State Controller Web Site
Sphere: Related Content


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