Monday, September 17, 2012

OMMMMMmg! California could start giving IOUs tomorrow

Looks like even the Terminator can't help them right now. A whopping $24 billion budget deficit and a legal stalemate between California's Democratic and Republican lawmakers over whether or not to raise taxes to balance the budget has led to this: Starting tomorrow, instead of paying its bills, the suddenly not-so-Golden State will be doling out IOUs to some of its vendors as well as agencies that work with the state, including those that provide support for the elderly and college students.

Barring any last-minute agreement between the battling legislative factions, California plans to give out $3.36 billion in IOUs this month alone. It's saving what little cash it does have to pay more urgent expenses, including its general obligation bond, which is sort of like a mortgage for municipalities; blow off that bill and you open up a huge can of worms. Ratings agencies have already downgraded California's debt rating, which is sort of like the state's credit report. A lower rating makes it more expensive for California to borrow additional funds in the future, something the state is expected to have to do.

Even if there is a budget agreement eventually settled on, it doesn't mean California's out of the (red)woods yet; lawmakers say it will still have to sell another $7 to $9 billion in short-term debt just to balance the books, which of course will have to be paid back at a higher interest rate thanks to the state's poor debt rating.


What's going on here? How did the Gold Rush state, home to Hollywood's bazillion-dollar estates and Silicon Valley's tech compounds, find itself in such crisis? Blame the recession, to start with, then blame the warring lawmaking parties. California was facing a 20% budget shortfall as a result of the recession, according to Bloomberg News.

Although the legislature put together a balanced budget back in February, that had to be scrapped when the deepening recession dragged the state's income down even further, and a series of special provisions that would have helped plug the budget gap (a little) were put before voters and roundly defeated.

Now, looking down a $24 billion hole, the state's elected leaders can't agree on how to balance the budget. Democrats charge that Republican governor Arnold Schwarzenegger's spending cuts would hurt the poor, while Republicans -- including the governor himself -- say the Democrats' plan to close the budget gap by raising taxes and pushing some fiscal obligations into next year will only hurt the state.

For the workers and agencies that may get stuck with these IOUs, the picture's not pretty. According to the Los Angeles Times, at least one California lending institution has agreed to accept the IOUs as if they were ordinary checks from the state. For the most part, though, IOU-holders will simply have to stick it out until the IOUs come due in October.

So, that sucking sound the rest of America hears coming from the left coast? That's the sound of an entire state holding its breath and holding out hope for a last-minute break in the legislative logjam. Sort of like yogic breathing on a state-wide level. Only a lot less relaxing.

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