While some on Wall Street would prefer that the IOUs keep coming, it looks like they will end sooner rather than later. JP Morgan Chase, one of our "too big to fail" banks, has decided to step in to the fray and loan the state some cash to cover expenses for the next month.
Treasurer Bill Lockyer says JPMorgan Chase & Co. has agreed to lend California $1.5 billion as part of Controller John Chiang's plan to begin redeeming IOUs on Sept. 4.
The IOUs, which the cash-strapped state began issuing July 2 to pay many of its business vendors and other creditors, were supposed to mature Oct. 2. But Chiang said last week that the budget passed by the Legislature produced enough savings to allow for earlier redemption of the scrip -- provided the state could get a $1.5-billion short-term loan by Aug. 28. (LA Times 8/19/09)
The risk here for Chase is almost zero, so what ever interest they get should be set at some sort of reasonable cost. The state should begin issuing revenue anticipation notes soon, and Chase will then get its cash back. I suppose it must be nice to have a billion or two to loan out when the mood strikes you.
At any rate, the ending of the IOUs was getting critical for small business that contract with the state. They've been essentially financing the state during this round of the budget debacle, and these aren't really people that can afford to do that.
Today is the first day that most large banks stop taking IOUs from individuals and small businesses. For those left holding them, the options are limited. Citibank agreed to a one-week extension, and Bank of the West will accept them - but only for existing customers. Other big banks may offer lines of credit or other short-term bridges for customers, but on a case-by-case basis. IOU holders needing cash might be able to try credit unions, or inevitably, check-cashing stores. And this all appears to suit Arnold Antionette just fine:
State Treasurer Bill Lockyer tried to persuade the big banks to change their minds about the IOUs. "We're just trying to convince them that it would be in the best interest of their customers and the best interest of taxpayers to give it more time," said his spokesman Tom Dresslar.
Gov. Arnold Schwarzenegger made no such attempt at persuasion. "His focus is to get a solution to our budget so we don't have to deal with IOUs," said his spokesman Aaron McLear. "I don't think it was anyone's expectation that they would honor them forever."
Emerging from a meeting with legislative leaders Friday, the governor would say only that "IOUs are one more reason to get the budget done as quickly as possible."
In 1992, the last time the state issued IOUs, the major banks accepted them for about a month. Their refusal to go any further was widely seen as a move to pressure officials to pass a budget.
Yes, of course, this is why he vetoed solutions that would have stopped the issuance of IOUs in the first place.
Meanwhile, John Chiang's latest release of the state economic picture shows a $10 billion dollar shortfall in Fiscal Year 2009, and a still-contracting revenue picture that has led to a $4 billion dollar delay in payments to local school districts. They has planned on sending out the money Friday; now they will hold off until July 30.
I was at the Chase (née Washington Mutual) this morning. Much to my interest, I got this message --> directing me to chase.com/cawarrants.
If you go to that link, you'll see that Chase seems to be indicating that they will be accepting the IOUs for their current customers:
Can customers deposit or cash these warrants?
Certainly! Chase will honor the California registered warrants for our personal, small business, and commercial customers (with the exception of financial institutions) similarly to a check not drawn on our bank:
Other banks have begun to indicate that they may not be as eager to accept the registered warrants, but most banks will be accepting them until Friday at least. After Friday, all bets are off.'
UPDATE: The subject just came up in Fiona Ma's webcast. She believes that banks will stop accepting them after tomorrow, and that people will not be able to receive payment for services provided to the state. This is a problem.
Peter Schrag is one of the few columnists left in this state who consistently makes sense, and today he attacks that silly NYTimes article about California, in particular the elements of conventional wisdom:
In his passing references to California's serious issues, many of which have major implications for the nation as a whole, Leibovich collects pieces of the conventional wisdom, even when, as in his facile summary of the causes of gridlock in Sacramento, it's wrong. Since Democrats have again and again agreed to multi-billion dollar cuts, it is not, as he thinks, just a matter of "'no more taxes' (Republicans) and 'no more cuts' (Democrats)."
And while Jerry Brown, in his prior tenure as governor was indeed labeled "Governor Moonbeam" (by a Chicago columnist) for his space proposals, as Leibovich says, the label applied much more broadly to his inattention to the daily duties of his office and, most particularly to his dithering while the forces that produced Proposition 13 began to roll.
Brown later acknowledged that he didn't have the attention span to focus on the property tax reforms that were then so urgently needed to avert the revolt of 1978. But to this day, almost no one has said much of Brown's role in creating the anti-government climate and resentments that helped fuel the Proposition 13 drive.
It was the Brown, echoing much of the 1970s counter-culture, who, as much as anyone, was poor-mouthing the schools and universities as failing their students and who threatened to cut their funding if they didn't shape up. It is Brown who spent most of his political career savaging politics and politicians, even as he ran for yet another office. Now this is the guy who wants to be governor again. But Leibovich doesn't tell his readers that long history. Maybe he doesn't know it.
The line about how those who fail to learn from history are doomed to repeat it can be inserted here. But Schrag hits on the most important failing of the article, and indeed of a good chunk of the political media here in California - they airbrush out the people who suffer for the failures of the politicians.
Where are California and the people who are feeling the pain - the school kids and teachers in hopelessly underfunded schools, the children who are losing their health care, the minimum-wage working mothers struggling to pay their child care, the students who are losing their university grants? Is all this really about nothing?
To far too many, the answer is yes. It's politics as theater, as a sporting event, where winners and losers are checked on a board, and whether or not a leader will keep their position is made the story rather than the principles he or she represents. And yet it's not Governor Hot Tubs and Stogies who will feel the pain of an economic downturn and massive budget cuts, nor well-heeled consultants or columnists who make up the scorecards. It's people.
People like the students in the Cal State system who may see their fees raised 20%, just months after a 10% hike approved in May. This will effectively block higher education for a non-trivial number of students, as will proposed enrollment reductions of 32,000 students.
People like LA County homeowners who have defaulted at twice the rate in May as they have in the previous month, as a foreclosure backlog builds up due to various moratoriums and an increase in repossessed homes entering the market.
People like IOU holders who may have to turn to check-cashing stores to get less-than-full value for their registered warrants after Friday, when most major banks (who have all been bailed out by the federal government, by the way) stop the exchange of the notes.
And people like the elderly, disabled and blind, who rely on the in-home support services that the Governor is trying to illegally cut in contravention of a contempt-of-court citation, at least in Fresno.
These are the great unmentioned in this California crisis, the people who Dan Walters tries to smear in his column today by turning every Democratic concern for the impacts of policy as a sellout to "public employee unions." Behind those unions are workers, and the people they serve need the help the provide, in many cases, simply to survive. But it would be too dangerous to Walters' beautiful mind to consider those faces, so he chooses to make political hay out of the violation of people.
Mr. Schrag's latest screed is a good example of why politics in Sacramento is so dis-functional. Instead of trying to find the truth in the Leibovich article, he mocks both the writer and each of the subjects. In recent years, Schrag has become increasingly bitter. That's very sad because he once was an open-minded person with real insight into the predicaments of modern society. Finally, his memory is not serving him well regarding Propistion 13 and the factors that constituted the ethos of that period. In fact, there was a long and hard fought battle to get property tax relief that got all the way to the state Senate but foundered just short of the necessary two thirds vote. There is much to say about government, schools and taxation in California. But to get anywhere it requires a degree of empathy and engagement with opposing perspectives that no longer seems congenial to Mr. Schrag.
Bloomberg reports that people are lining up for those souvenir Arnoldbucks.
Controller Chiang said the warrants can be transferred between individuals, setting up the possibility that a secondary market for the IOUs may develop. Already ads are appearing on Web sites such as Craigslist offering cash for the IOUs at below face value.
In such a transaction, the person who gets the IOU would get most of the cash they were due the state, while the person buying the IOU might then hold onto it until maturity and earn the face value plus the 3.75 percent interest.
At least one person offered to buy an IOU at more than face value as a keepsake.
"I am interested in purchasing a 'State of California IOU' as a souvenir," the ad reads. "I figure it would be an interesting thing to have around when my grandchildren are fighting over my stuff after I'm dead and gone. I will pay two times face value (up to $100, or $50 face value) for a warrant/IOU."
Of course, after July 10, the deadline that banks like BofA and Wells have given for exchanging these IOUs for cash, souvenirs may be the only value for these IOUs for a few months. Maybe Arnold will go to a baseball card convention and sign them himself!
Here's another FAQ about who receives IOUs and who does not. The unemployed, SSI/SSP recipients, state employees and retirees, IHSS and Medi-Cal providers will NOT receive IOUs. Welfare recipients, contractors with the state, local governments, and income tax refund recipients WILL get them. Felix Salmon made a handy chart that suggest the haves will keep getting paid and the have-nots won't, and that's somewhat true, but some have-nots who have the benefit of their services being partially provided by the Feds will get paid as well. In general, where you stand does depend on where you sit, in this crisis. This again makes clear that the idea of California debtholders, who get priority of payment in the state constitution over everything but education, getting stiffed by the state is a ridiculous one that pretty much cannot happen, and lowering bond ratings should be rightly seen as Wall Street gouging.
Small businesses, students, seniors, and taxpayers will all start receiving IOUS. This shameful day didn't have to arrive. In fact, Governor Schwarzenegger had several opportunities to prevent it.
On June 12 Governor Schwarzenegger unilaterally blocked the Controller's authority to secure short-term loans to avoid the cash crisis. He said, "let them have a taste of what it is like when the state comes to a shutdown -- grinding halt."
On June 25 after the governor called Senate Republicans to his office for private meetings, $4 billion in immediate cash solutions that had been passed on an overwhelming bipartisan majority in the Assembly were killed in the Senate.
Most recently, the governor vetoed a comprehensive package of budget solutions supported by majorities in both houses of the legislature that would have resolved the $19.5 billion deficit, left a $4.0 billion reserve, avoided the cash crisis and prevented IOUs [...]
We did offer, as a sign of good faith, to begin work immediately on reforms regarding restructuring Medi-Cal and eliminating fraud in the IHSS program. We also committed to working with the governor on other reform legislation for him to sign. But the governor wouldn't take "yes" for an answer. So California businesses, taxpayers and students will be receiving IOUs simply because Governor Schwarzenegger thought it was more important to immediately force last minute changes such as reducing future employee pensions, fingerprinting elderly and disabled Californians who receive services, and denying kids food stamps if their families can't access a computer to sign them up for the program.
The budget gap grows by $25 million a day and we have wasted billions of taxpayer dollars because the Governor wants to teach everyone a lesson. I hope that IOU secondary market is bigger than eBay, because those suffering with the consequences of dysfunction are going to need the help.
The IOUs are on the verge of being distributed. The Pooled Money Investment Board met today to hash out the terms for the IOUs, and surprise, there were some differences. The Governor wants a paltry 1.5% interest rate for the IOUs, and flexibility on repayment until as late as June 2010. That would be worse than a 1-year CD. Controller Chiang supports the staff recommendation of 3.75% interest rates and repayment in October. Chiang won. The board approved his terms.
The reason to offer a more attractive interest rate is to ensure that banks will actually cash them. Wells Fargo and Bank of America announced they will accept them, but only until July 10; after that, it's anybody's guess. Golden 1 Credit Union and Tri Counties bank of Chico also agreed to accept the warrants. This article gives a good rundown of how the IOUs will work. If your bank won't cash them, you're basically stuck with a piece of paper until October.
The most important question, of course, is why we're going down this costly route at all, when the Assembly and Senate Democrats fashioned a solution to avoid this. The answer is that the Governor wanted some leverage, the people be damned.
If the stigma of issuing IOUs triggers a budget deal in the coming days, Gov. Arnold Schwarzenegger might find redemption in his strategy of quashing a stopgap solution that would have avoided those non-cash payments.
But if no budget deal emerges soon, Schwarzenegger will have helped saddle the state with a lower credit rating and have nothing to show for it.
As a negotiating strategy, Schwarzenegger is counting on public pressure to mount against the Legislature as California issues IOUs today for only the second time since the Great Depression. The Republican governor could have backed legislation to avert IOUs this week, but he demanded that lawmakers solve the entire budget problem, which grew Wednesday to $26.3 billion [...]
Schwarzenegger wanted a full budget deal, and part of his calculation was likely that IOUs ramp up the stakes and force lawmakers to reach that goal sooner. Without IOUs, he figured lawmakers might have delayed compromise on the rest of the package, costing the state in a different way.
"If he had signed the stopgap measures, the Legislature would have gone home for Fourth of July weekend and come back when the threat of IOUs came up again," said Tim Hodson, executive director of the Center for California Studies at California State University, Sacramento. "I'm sure the governor went over this and thought: Are the consequences of the delay worse, and would he have lost the leverage that he has now?"
Well, this is a game played with people's lives. If banks won't cash IOUs, you can be sure Rite-Aid won't accept them. Or landlords. Or health care providers. In addition, this little power play cost taxpayers between $2 and $7 billion dollars, which I don't see Schwarzenegger going into his wallet to cover.
Rather than shock doctrine the legislature into making major policy changes as a condition of passing a budget, a more likely scenario is that this train wreck will spark reform efforts to finally get off this perpetual track of hijacking and stubbornness.
If California has become ungovernable, and teeters now on the brink of bankruptcy, it is due less to excessive spending than a deficit in democracy - the very essence of which is majority rule. A simply worded, one-paragraph initiative to restore majority rule in the Legislature might well prove resoundingly successful with a crisis-weary electorate. And while it may not be sufficient in itself to repair the state's balance sheet and fix its broken governance, restoring majority rule is the necessary first step toward ending gridlock, renewing public confidence, and preventing extremists of whatever stripe from holding future legislatures hostage to their own narrow agendas.
According to Mike Genest, the Governor's Director of Finance, the $24.3 billion dollar problem expanded by $2 billion dollars last night. He's not taking into account the interest on IOUs, of course, or the expanded borrowing costs. But he's factoring in the education spending that now cannot be cut below a certain level because of "maintenance of effort laws." Genest said that higher education has agreed to keep their books open an extra month, until July 31, meaning that the $1 billion in higher education cuts to the 2008-09 budget year could still be enacted. This is basically fuzzy math, since the additional expenditures due to the Governor's stubbornness do not get addressed.
What the Governor wants to do now, to recoup those cuts under Prop. 98, is to suspend the law. Once again, the reckless lawlessness of the Governor and his allies, out of an unwillingness to deal with budget reality, exposes itself. In addition, the Governor has backed off on the outsized budget reserve as well as eliminating vital programs like welfare, state park closures, children's health care and student grants. Of course, this has been replaced by unrelated items like cutting public employee pensions and social services fraud inspections, both of which would do nothing to the deficit in the near term.
The Governor has declared a state of emergency, under Prop. 58 rules. This means that the legislature has 45 days to come up with a solution on the budget, and if they fail to do so, they cannot adjourn or act on other bills. This is a moot point, since the Governor has vowed already to veto any non budget-related bill until a solution is reached. This just brings the legislature into special session (the fourth since December, I believe).
In addition, the Governor announced three furlough days a month for state employees to save cash, which amounts to a 15% pay cut. And IOUs will get issued tomorrow. They will have an interest rate for the banks which accept them of between 2-5%.
I suppose the only good news to come out of last night, and indeed this entire cycle of budget nightmares, is that we are not alone. Several other states missed their fiscal year deadlines. Illinois has no budget and no plans to enact one; Pennsylvania may not be able to pay state employees due to a failure to reach agreement; Arizona got a budget in under the wire, but the Governor has not indicated whether or not she'll sign it, because it doesn't include a sales tax increase she sought; Ohio approved a temporary 7-day budget as legislators continued to wrangle; Mississippi left their utility regulatory agency unfunded; Connecticut's Governor signed an executive order to keep the government running despite no budget. We can take little solace in these difficulties other than to note that the national erosion of tax revenues combined with balanced budget agreements make the situation almost impossible for many states, particularly the large ones, and because of the threat to any economic recovery that would result from massive reductions in state spending and services, the door may crack open for a second federal stimulus package that specifically targets state budgets. I don't think we're quite there yet, but the crisis reaches a whole new level starting today.
First of all, this is the first day that budget cuts from the previous agreement in February take effect for fiscal year 2009-2010. These include major reductions in health and human services:
SSI/SSP grants for low-income seniors and people with disabilities will drop by 2.3 percent, cutting the maximum grant for an individual from $870 to $850 per month. A previous SSI/SSP grant cut took effect in May, reducing maximum monthly grants for individuals from $907 to the current $870.
CalWORKs grants for low-income families with children will be cut by 4 percent, reducing the maximum grant from $723 to $694 per month (the same amount as in 1989) for a family of three in high-cost counties. CalWORKs grants have been frozen since 2004-05.
Dental services for most adults in the Medi-Cal Program will be eliminated along with seven other benefits, including eye exams and incontinence creams and washes. (Last week, a trial court judge in Sacramento County ruled against a group that sued to stop the cuts from taking effect.)
Grants on those who make the least are the most stimulative to an economy, because that money gets spent quickly. Now it's drying up.
Of course, there's also the matter of the still-yawning budget gap here in California, which just got $7 or $8 billion dollars larger, depending on your math. This means that even more damaging cuts, likely to the most vulnerable elements of society, will ensue, leading to another wave of job loss, foreclosures, and pain. The Governor and Senate Republicans are completely responsible for that addition to the deficit - consider that $7 billion is MORE than the money at stake to the near-term budget in the May 19 special election - and for the issuance of IOUs, which will add billions in unnecessary interest obligations.
In a nutshell, under the governor's IOU plan the state pays vendors and others it owes with the equivalent of a post-dated check that is good for the face value of the amount owed plus interest. IOU recipients, for the most part, "sell" their IOUs to a bank for the face value of the check for quick cash. The bank holds onto and then redeems the IOU at a later date, earning millions of dollars in interest.
This type of borrowing is nothing like pulling out the state's credit card to pay the bills. Rather, this is more like the state going down the street and getting an expensive payday loan.
The Governor's payday scheme not only makes California the laughingstock of the credit markets, but it unnecessarily puts a black eye on the state's long-term credit rating.
This means that, for years to come, millions of taxpayer dollars get shoved into the pockets of Wall Street bankers every time we issue long-term debt to build schools or roads, or other needed public projects.
Somewhere in the neighborhood of $6 billion dollars in additional interest alone will be added to the cost of selling bonds that voters have already approved.
Of course, by that time, Schwarzenegger will be out of office, so what does he care?
Harold Meyerson has the must-read of the day about this disaster, pinning the blame where it needs to go - on shock-doctrinaires like the Governor who demand to use this crisis to destroy the public sector. Read the entire thing, but here's an excerpt:
Right-wing ideologues see the crisis as an opportunity to shrink government regardless of the consequences. Schwarzenegger is proposing to end welfare, not just as we know it but altogether, and to throw 1 million children off the rolls of the state's healthy families program. But the consequences of closing the deficit simply through cutbacks will be felt by more than the poor. Already reeling from $15 billion in cutbacks that the state put through in February, many school districts, including that of Los Angeles, have canceled summer school this year. Scholarships that enable students of modest means to attend California's fabled university system have been slashed. Most of the state's parks may have to be closed as well.
The terrible irony in decimating the public sector to save the state is that the California that was the epicenter of the postwar American dream was fundamentally a creation of government. Fighting a Pacific war during World War II compelled the federal government to spend billions on California industry and infrastructure, and the state was the leading beneficiary of Pentagon dollars during the Cold War. As Kevin Starr, California's leading historian, points out in "Golden Dreams," his brilliant new history of the state in the 1950s and early '60s, fully 40 percent of all defense dollars for manufacturing and research in 1959 went to California, anchoring the state's booming economy in a well-paid workforce that was either unionized or professionalized, and seeding an electronics and high-tech sector that was to blossom in the following decades. Building on that prosperity to create more prosperity, Earl Warren, Goodwin Knight and Pat Brown -- two Republicans, one Democrat -- invested state dollars in schools, universities, freeways and aqueducts that were the best in the world. The Golden State was never more golden.
Today, its governor seems determined to turn that gold to dross. On Monday, the Democrats in the legislature passed a budget that included cuts of $11 billion, levied a tax on oil companies and tobacco, and raised auto registration fees by $15 per car to keep the state parks from closing. Schwarzenegger reiterated his refusal to raise any taxes or fees and said he would veto the budget.
There's still a chance to avoid IOUs, though I wouldn't call it likely. There is no chance to avoid the devastating impact of a broken political process and irresponsible legislating which at this point can only slide California into depression.
If no deal is reached between the Governor and the Legislature in the next 14 hours, California will start to issue IOUs to companies that do business with the state (mostly small businesses), taxpayers expecting refunds, and agencies delivering assistance to the most vulnerable members of society - welfare recipients, the elderly, disabled and blind, and college students expecting aid grants.
The biggest variable with these IOUs is whether or not banks will honor them, a decision that they have yet to reach.
The deciding factor could be California's banks. If they're willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They'll be able to cash the IOUs.
But if the banks resist, billions in state payments will be effectively delayed - putting renewed stress on a state and region already suffering from a deep recession. One Rocklin company, a temp firm that relies heavily on state business, has already laid off five workers in anticipation of a cash squeeze.
So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang.
She said banks are probably waiting to see how much interest the state will pay on the IOUs - a figure that won't be decided until Thursday, the same day Chiang is scheduled to issue IOUs. The notes will total $3.36 billion, with about $500 million targeted for the private sector.
In 1992, banks generally honored the IOUs by cashing them on demand. If you haven't heard, banks are in a slightly worse financial picture now than then, and might not be willing to float bridge loans for the state, even with generous interest, this time. And of course, if the banks agree to honor the IOUs, the state will be paying out hundreds of millions of dollars to them in short-term interest.
If the banks fail to honor the IOUs, you can just add that to the severe pain being felt by California residents at this time. The personal bankruptcy filings which soared in Southern California in the first quarter will only increase. The foreclosures, which have not only continued for residences but commercial property like hotels, will expand. With small businesses forced to cut back due to cash flow cutoffs from the state, expect more unemployment and a continued erosion of the tax base, leading to even larger budget shortfalls. This is a death spiral from which we will find it hard to extricate ourselves. California's role as the biggest of the "50 Herbert Hoovers" truly can threaten national economic recovery.
The Governor's shock-doctrine approach to the current budget crisis became very apparent this week, as he engineered rejections of bipartisan stop-gap measures and solutions that would cover $21.5 billion of a $24 billion dollar deficit. He clearly would rather essentially shut down the state government than participate in the normal political process of compromise and negotiation. This is his chance to be a dictator, and he is banking on the desire of Democrats not to watch the lights go out in Sacramento to push through his agenda.
Gov. Arnold Schwarzenegger, seeking to conquer what could be the last budget crisis of his tenure, is engaged in a high-stakes negotiating strategy with lawmakers that could force him to preside over a meltdown of state government.
As legislators have scrambled to stop the state from postponing payment of its bills and issuing IOUs starting next week, the governor has vowed to veto any measure that fails to close the state's entire $24-billion deficit [...]
The governor readily admits that he sees the crisis as a chance to make big changes to government -- to "reform the system," he said Friday -- with proposals he has struggled to advance in the past.
Among them: reorganizing state bureaucracy, eliminating patronage boards and curbing fraud in social services that Democrats have traditionally protected. The governor also would like to move past the budget crisis to reach a deal on California's water problems that has so far eluded him.
By agreeing to a partial budget solution such as one the Assembly approved Thursday, the governor would lose leverage to accomplish many of those things. Without the pressure of imminent insolvency, Democrats might be less likely to agree to his demands.
This is a dangerous strategy - not for Schwarzenegger himself, but for the hundreds of thousands of Californians who depend on a functioning state government every day. Contrary to popular belief, the recipients of these IOUs would not be debtholders or vendors, but the most vulnerable people in society - families on welfare, the elderly, the blind, the disabled, and poor college students with state aid grants. These are the pawns in the game Arnold has been playing.
The Governor has brought back to the table long-sought goals that he wishes to implement over the protests of a majority of the legislature. Some of them are described in his weekly radio address. The LA Times has a good synopsis here:
Back on the governor's demand list is a plan to cut the pensions received by state workers, which unions have stymied before but which he thinks may gain traction with a cash-strapped public. Schwarzenegger also views this as an ideal time to once again target growth and fraud in the state's multibillion-dollar in-home healthcare program, which employs 300,000 unionized workers.
His agenda includes anti-fraud efforts and tougher enrollment requirements for the state's food stamp programs, efforts that advocates for the poor say are designed to discourage people from participating. In his radio address, he said the state and counties could get by with a "fraction" of the 27,000 workers now handling eligibility for Medi-Cal and food stamps by using Web-based enrollment.
Schwarzenegger has revived plans to allow local school districts to contract out for services like school bus transportation and lawn maintenance, a proposal favored by the GOP but despised by school employee unions.
Arnold has basically taken the lesson of the GOP, holding the budget hostage for pet projects like privatization and purging state services rolls of the dependent (I'm sure a lot of the desperately poor have Web access to fill out their forms).
One wonders if this will finally color the local coverage of the Governor, which throughout his tenure has been fawning, even in the face of near-historic unpopularity. Some reporters seem to be coming around.
Last week, there was news of counties suing the state for their money. LA was even thinking of withholding sales tax revenue from the state. Yes, the counties were angry then. But, imagine what happens when they get IOUs in the mail:
California's budget woes will sweep over the state's 58 counties this week when they get promises instead of checks for $89 million in anticipated payments for welfare, food stamps and other services.
The move will be a devastating blow to the counties, which must serve more and more people looking for government help as the economy craters and jobs disappear, said Paul McIntosh, executive director of the California Association of Counties. (SF Chronicle 2/10/2009)
That's all well and fine for governments to transfer bad checks amongst themselves, but how are the counties supposed to turn those slips of paper into actual money for services? How does that buy food for food stamp recipients, and how does that send out welfare checks.
Of course, this isn't any sort of solution, but John Chiang really has no choice. You can't send money that isn't there, and we don't have the federal government's luxury of printing money.
There is some money for these types of services in the stimulus, or at least there was, but there is no telling what emerges from the conference committee. Either way, the state at this point is just paying their problems forward to the actual service providers, the counties.
There are no winners now, save those who laugh at our predicament. Those who want to see the collapse of our social safety net and the civilized and advanced society that we have built here have much to love. Those who are not quite so depraved are out of luck.
Two nominations here. By the way, since it recently came up in comments, the reason we here at Calitics call the California Republican Party the "Yacht Party" can be best explained here and here.
Nominee #1: Sen. Roy Ashburn of Bakersfield, who introduced a bill that would eliminate IOUs for tax refunds.
State Sen. Roy Ashburn, R-Bakersfield, has introduced legislation requiring California's controller to issue state income tax refunds in cash.
Controller John Chiang has announced his office will have to delay refunds for 30 days starting Feb. 1 because of the state's cash-flow problems. He has threatened he may have to issue refunds in the form of IOUs if a budget addressing the $41 billion shortfall the state's projected to have by mid-2010 isn't passed.
Chiang has said refunds will resume when he's sure there's enough state cash on hand.
Ashburn has said tax refund money belongs to the taxpayers, not the government, and taxpayers should get it back in the form it was paid - "cold, hard cash." California's constantly taking in cash, he's said.
Hey Roy, I know a bill you could pass that would get cold hard cash back in the hands of your constituents. It's called the budget, and without it California is out of money, and fiduciary responsibilities (sorry for the $1 word) stipulate that other priorities must be paid first. It's called "how government works," and though you're a State Senator I'm not surprised at your ignorance.
Nominee #2: Faux-moderate Abel Maldonado, angry about the Controller's office "requesting new furniture" even though the current Controller, uh, didn't do that.
"I don't like the fact that hard working people in my district are getting IOUs and he's buying millions of dollars worth of furniture," Maldonado said in an interview. (For the record, taxpayers due refunds from the state and others missing payments aren't getting IOUs just yet. They're simply not receiving anything at all.) [...]
"Had he done any homework, the senator should have realized that the expansion project, including furniture,...began before Controller Chiang took office," his office said.
Further, Chiang's office argued, the controller "demanded that staff cut down the costs, and by changing financing, materials, design, and construction, reduced the overall expense of the project by more than 50 percent" - a $4 million savings.
Next for Maldonado, he'll lambaste Arnold Schwarzenegger for Prop. 187. Wanker.
Sometime next week California is going to begin running out of money, and instead of sending checks that to people that are owed tax rebates, financial aid, or other forms of state assistance, they will either have their payment delayed or receive an IOU. This will make our recession even worse, and will make it more difficult for the state to begin economic recovery.
The budget crisis has many fathers, but one in particular stands out - Arnold Schwarzengger. For five years he railed against taxes and government spending, and because he failed to lead the state toward a stable budget, California is going broke. Yet the media persists in speaking of Arnold as a strong post-partisan leader. They don't tell Californians that he is a failure, that he is more responsible than anyone for the IOUs - particularly since he vetoed the Democratic majority vote budget plan that would have finally neutralized the 2/3 rule.
Progressive Californians need to engage in many forms of activism to respond to this crisis - and one of those forms is good old fashioned agitprop. And that's what the Courage Campaign has done with Arnoldbucks. - our term for the IOUs that are almost inevitably going to be sent soon to Californians.
We made a video that answers the question of "what happens when Californians actually try to use an Arnoldbuck?" The result is frustrating and humorous, and hopefully it can help show Californians that this crisis literally has Arnold's name all over it. And we also created our own version of the Arnoldbucks for Californians to download, print, and give to their friends.
Obviously the impact of Arnoldbucks, if and when they are actually sent to Californians instead of the payments they are owed, will not always be funny. Disabled families, health care clinics, and schools will be hit extremely hard by the state's inability to meet its financial obligations. That will require a multifaceted response - including an effort to educate the public as to who is responsible for this mess. Our video campaign is one attempt to do exactly that.
So have a look at our Arnoldbucks video and share it with your friends - and help us push back against a media that refuses to hold Arnold accountable.
I will be on KRXA 540 AM at 8 to discuss this and other topics in California politics
George Skelton runs hot and cold in terms of the usefulness of his observations, but today he starts to get closer to the truth by exposing Arnold Schwarzenegger's complete failure of leadership on the budget mess. As the state moves to the edge of total meltdown, it's becoming undeniable even to California's centrist Villagers that instead of being some post-partisan strong leader, Arnold is just a failure:
Californians haven't been prepared by their political leaders for the one-two punch. Sure, the public has a vague idea of what's coming, but too many people aren't certain it's necessary -- especially the tax hikes during a deep recession.
That's not just my view. It's also the observation of Gov. Arnold Schwarzenegger's predecessor, the governor he ousted in the 2003 recall election: Gray Davis.
Gray Davis told me: "People are going to get hit with major tax increases and program reductions and no one is preparing them. Part of leadership is not just doing the job, but explaining to the public why a certain action needs to be taken. Why it needs to happen and how long it will remain.
"You have to bring people along with you. President Obama is a master of selling the public on why his programs make sense -- in contrast to the deafening silence coming out of Sacramento."
Of course, Davis isn't quite right here - there has been more than "deafening silence" coming out of Sacramento. Arnold and his Yacht Party allies have been pretty vocal about the crisis - they believe government is the problem, and have been telling the public that at almost every opportunity. "Economic stimulus" is defined by them not as job creation (which is how Obama, the Congress, and virtually every economist see it) but as rolling back environmental and labor regulations and gutting spending.
Arnold has been consistent in pushing an anti-government message, so is it any wonder that is what the likely outcome of all this will be? Democrats speak of the 2/3 rule, as do we on the blogs, but the media centrists like Skelton rarely see fit to mention it. The public then looks at Sacramento and says "you suck" without really understanding what the problem is - a Republican filibuster intended to cram Grover Norquist's agenda down our throats. Like Rush Limbaugh, these wingnuts weaned on talk radio want California to fail.
Arnold spent the first 5 years of his time as governor telling Californians they could have it all - a growing economy, the public services they want, and the low taxes they feel are a birthright. He sold that message so well that when he tries to turn around and say that tax hikes are necessary, nobody is listening to him.
This budget and economic crisis has many fathers, but none more prominent than Arnold Schwarzenegger himself. When the state issues IOUs next week they will be his true legacy to California - a governor who failed so completely that the state had to print funny money to meet its obligations. The honorable thing to do would be to admit failure and resign. Unfortunately we're stuck with him for two more years.
I just heard Will.I.Am on NPR talking about education cuts in California. The budget crisis has gone mainstream. And once everyone gets the news that tax refunds, welfare checks and student grants will be suspended because the state is out of cash, a whole lot of other people might get some awareness as well. The dirty little secret about "liberal bastion" California is that we are not a civically engaged people, generally speaking. The budget has been in "crisis" for decades but not enough Californians have mustered up the interest in it. We have right-wing astroturf movements that play to base emotion, but not really citizen's movements that ask for basic fairness. Californians are 45th in the country in volunteering, 44th in attending community meetings and 45th in working on community problems. Chalk it up to traffic or self-absorption or what have you, but the general take is that Californians don't see much beyond what is in front of them. IOUs would change that. Well, maybe. It depends on if the banks will accept them, which is still being negotiated.
The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the elderly, blind and disabled; and $13 million in grants for college students.
Even if a budget agreement is reached by the end of this month, tax refunds and other payments could remain temporarily frozen. Chiang said a budget deal may not generate cash quickly enough to resume them immediately [...]
State officials have already designed an IOU template, Chiang said, and have been negotiating with banks over whether taxpayers could cash or deposit them if they are issued. The state could be forced to pay as much as 5% interest on delayed tax refunds if they are not paid by the end of May, Chiang said.
The last time the state issued such IOUs -- the only time since the Great Depression -- was in 1992.
In other words, the only way this delayed tax refund is going to work is if it causes MORE debt for the state. But let's go back to 1992. This was the last big recession in the country, and California again found itself unable to pay its bills. Tell me again how the budget problems aren't structural. Anyway, the state issued about $350 million in IOUs that year, about 15% of what is being prepared today. The process was not smooth:
IOUs have caused headaches for the state in the past. California issued $350 million worth of IOUs to 100,000 recipients in 1992 during a budget impasse between then Gov. Pete Wilson and the Legislature.
A four-year legal battle ensued after some workers had trouble cashing them. The dispute was settled in 1996 with some state workers getting paid time off for the inconvenience they experienced.
Beth Mills, a spokeswoman for the California Bankers Association, said individual banks statewide haven't decided yet whether they will accept the state IOUs this time.
Banks are barely willing to lend money, I just don't think they're going to be interested in accepting $2.3 billion in IOUs when the process was so difficult last time, and there is more uncertainty in the financial markets now. And even if they do, it will not be uniform across all banks, and customers are going to have varying experiences.
The State of the State speech that nobody watched proved the need for fundamental reform, but it generated barely a blip among non-elites. Having trouble cashing your disabled mom's assistance payment, that's a whole different story. Not to mention the fact that the continued erosion of jobs and the 5,300 public works projects that have been delayed by the state will create a lot of angry and idle minds. Of course, the cautionary part of this is that the 1992 IOUs did not lead to structural reform. However, we all can agree that this is a much bigger problem.
Pitchforks and torches may be at a premium. And while it's hard to write a new Constitution in a riot, something needs to shake up this decayed and dysfunctional system.
Nominee #1: 
Nominee #2: 