California Refuses its Own IOUs

I expected this to happen, California Won’t Accept Its Own IOUs:

Small businesses that received $682 million in IOUs from the state say California expects them to pay taxes on the worthless scraps of paper, but refuses to accept its own IOUs to pay debts or taxes. The vendors’ federal class action claims the state is trying to balance its budget on their backs.

Lead plaintiff Nancy Baird filled her contract with California to provide embroidered polo shirts to a youth camp run by the National Guard, but never was paid the $27,000 she was owed. She says California “paid” her with an IOU that two banks refused to accept – yet she had to pay California sales tax on the so-called “sale” of the uniforms.

The class consists mostly of small business owners, many of whom rely on income from government contracts to keep afloat. They say California has used them as “suckers” as it looks for a way to bankroll its operations while avoiding its own financial obligations.

“Instead of seeking funds through proper channels, the State has created a nightmare,” the class says. “Many of these businesses will not survive if they are required to wait until October 2009 to have these forced IOUs redeemed by the State.”

The class claims the state is violating the Fifth and Fourteenth Amendments. It demands that California be ordered to honor its own IOUs, plus interest. They are represented by William Audet.

…time to flood the FTB with IOUs. Let them issue a public explanation as to why they do not want to accept the state’s own IOUs.

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California – First IOUs going out

The time has come. For only the 2nd time since the Great Depression, California sends out IOUs:

Reporting from Sacramento — Deep in debt and short on cash, California on Thursday churned out its first batch of IOUs in nearly two decades amid grumbles from bankers, growing public outrage and scant progress in negotiations to resolve the state’s widening budget deficit.

The state controller’s office fired up a pair of printing presses and began rolling out nearly 29,000 IOUs totaling more than $53 million, most of them destined for residents around the state still awaiting income tax refunds. Recipients also include some businesses, pensioners, health clinics, college students and many others who get checks from the state.

“We never thought we would do it again,” said Dorothy Cottrill, who manages check disbursement at the state controller’s office and still remembers the last time the state spun out IOUs in the lean days of 1992.

The unusual move came hours after a panel of state finance officials set the annual interest rate for the IOUs at 3.75% for banks and other financial institutions willing to accept the vouchers. Some banks, including Bank of America, Citi and Wells Fargo, have agreed to honor the paper, but only until July 10. Many recipients could receive their IOUs after that date.

Those who don’t have a bank that will cash the IOUs can redeem them from the state Oct. 2, or sooner if officials settle on a solution to the financial crisis.

Rodney K. Brown, president and chief executive of the California Bankers Assn., said the state’s failure to resolve the budget crisis “has placed a tremendous burden on California’s citizens, communities and banks.”

State officials estimated that without a budget resolution they will have to issue $3.2 billion in IOUs in July and $1.65 billion in August.

State Controller John Chiang said the IOUs “are a sign that the state is being fiscally mismanaged” and a precursor to further credit downgrades for California, already the lowest-rated state on Wall Street.

The IOUs come two days after state Senate Republicans, with the support of Gov. Arnold Schwarzenegger, blocked an eleventh-hour attempt by Democratic leaders to push through budget proposals that would have staved off the IOUs, at least temporarily.

Outside the Capitol, the mood was cross. Richard Blitz, a 73-year-old owner of a downtown Los Angeles variety store, said the IOUs seem a hollow gesture by a state government struggling for answers.

“It’s candy for a hungry man,” he said. “Banks will accept it for a week or two, but what will happen after that?”

Thomas Bent, medical director of the Laguna Beach Community Clinic, expects to receive more than $10,000 in IOUs and may be forced to dip into reserves after the big banks stop accepting them.

“I can’t pay bills with IOUs,” Bent said. “I can’t pay salaries with IOUs.”

Los Angeles County officials said they should have enough cash in the bank to operate unfettered through the summer and would cash its IOUs with Bank of America. They said that after the July 10 cutoff, the county might become something of a bank, purchasing the IOUs from institutions and individuals, then holding them until they can reap the interest from the state.

The county performed a similar role when the state issued IOUs 17 years ago.

With the state economy hobbled, tax receipts waning and the budget deficit continuing to grow, the governor declared a fiscal emergency Wednesday and ordered state workers to take a third unpaid furlough day each month. He also issued a new list of proposed cuts to schools and public universities to address a deficit that his finance team now says has swelled to $26.3 billion.

On Thursday, the Department of Motor Vehicles announced it will close its offices each of the Fridays that remain in July to comply with Schwarzenegger’s latest furlough order.

But the governor and legislative leaders remained divided on several fronts. Schwarzenegger wants to save money by tackling fraud and waste in the state’s health and welfare programs and to deflate state worker pensions. Democrats are pressing to retain as much as possible the state’s social safety net: welfare, children’s health insurance, in-home support for the elderly and other programs.

The governor said during an appearance in Los Angeles that lawmakers apparently have decided “it is more important to protect state employees and to protect all of the different people and labor and special interests, rather than protecting . . . the people of California, the taxpayers.”

A downcast Assembly Speaker Karen Bass (D-Los Angeles) blamed Schwarzenegger for linking a budget solution to his push for a government overhaul.

“Frankly, I have really begun to be concerned,” Bass said, adding that Schwarzenegger’s priority seems to be “fixing his legacy.”

An additional difficulty looms. Budget negotiators say it seems increasingly clear that a balanced budget could require suspending school funding guarantees embodied in Proposition 98 — and wrangling with the powerful California Teachers Assn.

Still, most lawmakers left the capital for the holiday weekend. Legislative leaders said they would remain behind to continue negotiations.

Meanwhile, the controller’s office pumped out the IOUs for only the second time since the Great Depression. The black-inked documents look like checks but have the words “registered warrant” emblazoned on them.

Workers placed the foot-high piles of paper promises into boxes for sorting, packing and shipping as news photographers watched.

The state’s Constitution requires that education and debt service payments be made — in cash — before all others. After that, those who must be paid in cash include state workers, the state’s CalPERS and CalSTRS pension funds, In-Home Supportive Services and Medi-Cal providers.

Please consider An Economy Bigger than Russia, Brazil, Canada, India or Spain Is About to Default:

An economy bigger than Russia, Brazil, Canada, India or Spain is in imminent risk of defaulting on its debts.

Which nation am I talking about?

Not a country . . . but the state of California.

California’s GDP was around $1.812 trillion in 2007.

According to the International Monetary Fund, that is bigger than the 2008 GDP of every country in the world except the US, Japan, China, Germany, France, UK and Italy.

… of course the author means the government of one of the biggest economies, not the economy itself.

The first IOUs are going out to people who were still waiting for their tax refunds. Lots of people who were expecting to receive cash are now receiving paper with a promise to get paid by October 2nd. Of course the state will do everything possible to push it out to this final date.

Of course this will add significantly to the ongoing drag on consumer spending and investment. Please note that other states may follow California’s example in the months to come. Also, the impact on the US as a whole seems to be rather underestimated at this point.

Aside from the states’ debt crisis, the commercial property implosion and accelerated credit card defaults are only just beginning to unfold. Roughly $2.5 trillion Alt-A resets are only just ahead of us. Whoever talks about a coming inflation and/or recovery is either not looking or fooling himself.

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California – Ready, Set, IOU!

California is about to issue its first IOUs as a response to the budget crisis, State IOUs loom as foes’ battle lines harden:

Reporting from Sacramento — After trying for weeks to fix a state budget gone out of control, Gov. Arnold Schwarzenegger and state lawmakers stood frozen in conflict Wednesday with the state at the brink of a meltdown.

A day after the state Senate failed in a late-night bid to close part of a deficit now projected at $26.3 billion, California Controller John Chiang took steps to begin issuing IOUs today to tens of thousands of companies and individuals that are owed millions of dollars by the state.

When the scale of the budget crisis became clear in May, Bass, the governor and other state leaders expressed confidence that they could attend to it swiftly. A budget put in place in February to take the state through the middle of next year had fallen out of balance. Revenues declined amid a continuing economic downturn, and voters rejected a slate of ballot measures that were intended to raise nearly $6 billion.

I should point out that the scale of the budget crisis was clear for much longer than since May, unless your ability to look forward is limited to 1 month. I wrote about it in January (and others actually did way before me) …

California has to wake up to reality. Whether we like it or not, the state needs to stop paying unionized workers outrageous wages. Instead of reducing expenses for some departments and programs, it needs to dismantle and abolish entire departments and programs. It needs to stop funding unsustainable pension plans. In return it needs to drastically cut the overwhelming taxes and fees that are stifling its economy.

If it doesn’t do it now, then it will have to do it later, by declaring bankruptcy, which will completely wipe out all programs and departments that can then no longer be funded anyway.

The LA Times article concludes with:

The governor and lawmakers appeared resigned that they could no longer avoid the IOUs. A panel of finance officials will meet today to determine the interest rate for banks and other financial institutions that accept the IOUs. Some banks have already agreed to honor them, including Bank of America, which will accept the scrip until July 10. Other banks have not decided.

Note that BofA will be accepting IOUs until July 10th only. Then what? Time for California legislators to come to their senses and wake up to reality. Will they listen this time? Take your guess.

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