Will the California IOU system be devastating to businesses?
The quest to balance the state budget remained mired in sharp rhetoric and fruitless votes Monday, as the clock ticked nearer to California running out of cash and paying its bills with IOUs. Senate Republicans blocked a trio of bills that promised to stave off the need for IOUs for a few weeks. Senate Democrats passed a budget-balancing package of seven bills that Gov. Arnold Schwarzenegger said would be dead on arrival at his desk. The Republican governor has backed off initial demands to eliminate safety net programs such as welfare-to-work and Healthy Families insurance for low-income children to bridge a $24 billion deficit. But he wants Democrats to accept $2 billion in deeper spending cuts, in addition to an overhaul that reduces pension benefits for new state employees. Schwarzenegger also wants Democrats to reconsider borrowing $2 billion from local governments rather than raise revenues through oil or cigarette taxes, according to an administration document. He plans to keep
It was never a realistic hope that California would pass a budget that would close a gap of $24 billion between spending and income. Too many critical state services need funding and the destruction of jobs and real estate values have driven down California’s tax base to an unanticipated low level. The state said it would have to resort to paying vendors with IOUs if the new budget was not in place today, and that has inevitably happened. According to Reuters, “To conserve cash, State Controller John Chiang plans to issue IOUs by Thursday to the state’s vendors, local agencies overseeing health programs and various recipients of state aid.” The action will certainly bankrupt many state businesses, cut essential state services, and deeply wound consumer spending. Not all of the suppliers to the state have the balance sheets and cash flow to withstand a period when they are being given paper that may be worthless. Their banks are not likely to take the IOUs as collateral, leaving them wi
