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Deficit forces California to issue IOUs
By Matthew Garrahan in Los Angeles
Published: June 29 2009 19:26 | Last updated: June 29 2009 19:26
California is preparing to issue IOUs to its creditors this week as it grapples with an unprecedented cash crunch and prepares to begin its new fiscal year deep in the red.
Once the US’s richest state, California now has the dubious distinction of having the worst credit rating in the country.
It is facing a budget deficit of $24bn (€17bn, £14.5bn) yet Arnold Schwarzenegger, its governor, and the state assembly cannot agree on a budget that would address the shortfall.
California’s fiscal year ends on Wednesday but as the state’s cash reserves are empty, IOUs will be issued to a range of creditors, including contractors, such as information technology companies and the food service groups that cater for prisons.
“On Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” said John Chiang, the state controller. “Unfortunately, the state’s inability to balance its chequebook will now mean short-changing taxpayers, local governments and small businesses.”
The state is also likely to issue IOUs to the US government. California currently contributes funding for government-run programmes for elderly and developmentally disabled people but is considering issuing IOUs to cover its contributions because of the lack of cash.
Education funding is protected under the state’s constitution while payments on the state’s bond debt are also guaranteed under state law.
Democrats and Republicans in the state government last week struck an agreement on a range of money-saving measures. However, Mr Schwarzenegger has threatened to veto the plan on the grounds that it was a piecemeal solution to California’s budgetary woes.
Mr Schwarzenegger said he would veto any bills that raised taxes without reforming the state’s government. “I will veto any majority vote tax increase bill that punishes taxpayers for Sacramento’s failure to live within its means,” he said. ”The legislature will have a difficult time explaining to Californians why they are running floor drills the day before our budget deadline. We do not have time for any more floor drills or partial solutions. It’s time for the legislature to send me a budget that solves our entire deficit without raising taxes.”
Originally posted by crw2006
Imagine giving your creditors IOU's! LOL.
Hey visa, I cant pay this month, but I'll give you an IOU.
The only way there going to get out of this is to drastically cut programs. Lay off thousands of govt workers. Could we see the first
The state has appealed to Washington for a federal bailout, but it got a cool response from the Obama Administration. The next step is draconian cuts in state services and payroll, but Weiss says that will only deepen the "depression" in California, where the unemployment rate is 11.5%, by further cutting into tax revenue.
Asked to put odds on California defaulting on its $59 billion in outstanding general obligation bonds, Weiss doesn't hedge. "It's unavoidable," he tells Fortune.
If he's right, the impact on investors would be far broader and deeper than Bernie Madoff, General Motors (GMGMQ) or any of the other investment implosions that have occurred over the past year.
Originally posted by Hastobemoretolife
reply to post by Republican08
It's crazy. All they have to do is cut the unnecessary entitlement programs and they won't have to issue IOU's. But of course the congress in that state is more worried about getting re-elected than it is to keep the whole US economy from collapsing. It really boggles the mind.
As far as a State Bailout? Not going to happen, it would be political suicide for everybody in the US congress that would vote for it. We will see though. Things are so on edge that anything can be the straw that breaks the camels back.