California’s chief accountant on Monday will begin delaying nearly $4 billion of scheduled state payments, postponing income-tax refunds, grants to college students and welfare checks in an effort to prevent the state from running out of cash.
The delays will hurt an already wilting state economy, economists said, calling them the opposite of stimulus checks because people won’t get money they expect to receive. Controller John Chiang has said the delays will last 30 days.
Now, as lawmakers continue to haggle over how to erase a budget deficit projected to reach $42 billion by mid-2010, the state’s chief accountant has said he must delay payments to meet constitutionally mandated debt obligations.
Included in the delayed payments are personal income-tax refunds totaling nearly $2 billion, as well as bank and corporate tax refunds, among other things.
While many counties have enough cash to get through February, Trinity County in Northern California has only two to three weeks of reserves, said Dero Forslund, Trinity’s administrative officer. Once the money runs out, the county will issue IOUs to its 320 workers, he said, and then see if service reductions will be necessary as well. Trinity was expecting $2 million from the state in February, he said.
For years, California has relied on borrowing, by selling municipal bonds, to help get through difficult budgetary situations. But with a bond market that has nearly dried up — and with a poor credit rating — the state is hard-pressed to borrow. California is already tied with Louisiana for the lowest credit rating among states.
To help close the budget gap, California Gov. Arnold Schwarzenegger last month ordered some state employees to take two days off a month without pay, starting Feb 6. The order applies to tens of thousands of state workers — out of a total of 238,000
The Cruel Irony of Excessive Debt
Call it what you will. California avoids the legal definition of default but to the many creditors stiffed by the State, it makes little difference. Those relying on income tax rebates and welfare checks to pay their bills will not be able to. This broadens the economic pain to other creditors, retailers, etc. continuing the vicious downward cycle. California must cut its spending but every spending cut equates to an income cut for someone else.
End result of excessive debt – The State is left with zero options – it cannot borrow, it is defaulting on payment obligations and tax collections are plunging as the California economy implodes. Every action the State needs to take to survive further harms their economy. Further defaults or “debt holidays” by the State of California are inevitable.
“Fiscal Armageddon” has already sunk its teeth into the country – why should California be any different? With large numbers of immigrants, low-income residents, and disproportionate amounts of wealth and conservatism planted in Southern California, we’re pretty hopelessly screwed at this point. The battle of liberal vs. conservative will be waged across our great state with the whackos up here in San Francisco yelling for more social services and the LA neocons screaming for tax cuts; the truth is we all need a break and arguing about it isn’t going to help anything.
In such tumultuous times, an anticipated tax refund check can mean the difference between a roof over your head and eviction or food in your stomach and starvation. Many Californians who may have once blown stimulus checks and tax refunds on frivolous expenses are now counting on that mini-windfall to get them through what has already worked out to be a rough beginning of the year.
What exactly are we supposed to do with an IOU? California will not solve this budget crisis. Instead of IOU, an FU might be more appropriate because no one is going to be able to collect on these without putting the state in even deeper trouble.
The upside? These IOUs earn interest. Sadly, it’s a false upside – imagine millions of Californians owed 5% on promissory notes trying to squeeze blood out of a turnip. It just isn’t happening.
And no, California will not allow you to remit an IOU with your tax returns. This is a one-way dicking, my friend, and you are on the receiving end.
California’s “Super Stimulus” Program Fails
California has been living on vast amounts of borrowed money for decades. The State has effectively been running “super stimulus” programs on a vast scale for years. The false prosperity created by stimulus spending is now over. The economic pain that follows will destroy the financial security of many State residents. Was the excessive spending with borrowed money worth the results? The California example of failure should be considered in Washington as lawmakers attempt to “super stimulate” the entire country by burying us in more debt.