State rolls out $3.36 billion in IOUs today

[Francois Cellier]

From the San Francisco Chronicle

State rolls out $3.36 billion in IOUs today

Carolyn Said and Nanette Asimov
Chronicle Staff Writers
Thursday, July 2, 2009


California plans to begin issuing billions of dollars in IOUs today to scores of creditors, including private businesses and county governments.

The move will not affect many individuals who receive government assistance. Low-income people, the elderly and the disabled will receive their regular checks on schedule. Schools, state workers, Medi-Cal providers, pension funds and In-Home Supportive Services are all protected by law from receiving an IOU in lieu of a real check.

But thousands of vendors who provide goods and services to the state will be given IOUs instead of cash. From a company that sells french fries for prisoners to a firm that pumps out latrines in state parks, many businesses are trying to save cash and hoping their banks will accept the IOUs.

Meanwhile, the University of California has not yet decided whether it will front the money for educational Cal Grants, another program that will get IOUs.

State Controller John Chiang expects to disburse $3.36 billion in IOUs and $10.9 billion in regular payments this month.

After officials decide this morning how much interest they'll pay on the IOUs and when they can be redeemed, the controller's printing presses will churn out the first batch of IOUs for 28,742 state tax refunds totaling $53.3 million, said Garin Casaleggio, a spokesman for the controller.

The IOUs probably won't be cashed by the state for 90 days - and then only if the treasury has the money to cover them.


Business impact

Bank of America said it will accept IOUs from existing customers until July 10, with no dollar limits. Wells Fargo and Bank of the West have not yet decided whether to accept them. About 19 California credit unions will accept the IOUs, including Chabot in Dublin, Contra Costa in Martinez, SRI in Menlo Park, Provident in Redwood City, San Francisco in San Francisco and Kaiperm Diablo in Walnut Creek.

Many companies said they will simply tighten their belt and wait to redeem their IOUs.

Ken Jackson, owner of Vallejo's Ktek Products and Systems, sells office supplies, computer accessories and janitorial supplies to the state.

"The key is to have cash flow to weather the storm," he said. "My cash flow is about 60 days out. If it goes beyond that, I'm in trouble."

American Transit Supply in Hayward does about three quarters of its business with the state, providing air filters, oil filters and hydraulic filters for state vehicles such as CHP cars and fire service trucks.

"We figure we've got about $50,000 to $70,000 in accounts receivable with California," said Brian Beery, vice president. His firm has stockpiled cash to make it through and will temporarily transfer its 10 employees to a sister firm.

Thompson's PortaSeptic Services in Fort Bragg, a self-described "mom and pop shop," expects to receive IOUs for pumping out septic tanks in Mendocino County state parks, said owner Melissa Berman.

"It would be a hardship," she said. "We can handle it but we will have to scramble to cover all of our standard expenses. But a couple of months (of IOUs) would not put us in jeopardy."

At French Fry Xpress in Milpitas, owner Art McCoy said he expects to get IOUs for his french fry deliveries to state prisons.

"It's just two of us, my son and myself, so we don't have any payroll," he said. "We'll just have to wait until the budget is settled."


Other costs

Some of the IOUs' impact will not trickle down to Californians because of backfilling from the federal government, counties and colleges.

For instance, cash assistance for aged, blind and disabled people will be paid in full by the federal Social Security Administration during July and August. As part of a February agreement, counties already plan to cover CalWorks temporary assistance in July and August.

The controller will issue IOUs to the California Student Aid Commission, which administers Cal Grants, the state-funded financial aid that helps about 143,000 students attend college. Grants top out at $7,788 for a state college and $9,708 for a private one.

"If I'm not able to get it, I might have to take a leave of absence from school to work and pay for tuition," said UC Santa Cruz senior Tommy Le, who works two jobs on campus and helps support his family. "Our state is divesting from students. It's heartbreaking."

In the past when state budgets have been late, UC and CSU have advanced the grant money to students, interest-free.

UC spokesman Ricardo Vazquez said the university has not yet decided whether it will do so this year. CSU students "will definitely be covered," said spokeswoman Claudia Keith.


Bay Bridge project OK

Some state contractors have their own revenue sources.

Bart Ney, Caltrans spokesman for the Bay Bridge project, said that financing for the bridge will go through because it comes mainly from tolls, the result of AB144, approved in 2005.

"It's good for us," Ney said. "We get to keep going."

One firm said it chose not to do business with companies that rely on state payments. San Mateo's Bay View Funding provides short-term financing for companies. One client was a temporary staffing agency that works for the state, which used Bay View to meet its weekly payroll.

"We were uncomfortable with the state and their ability to put a budget in place so we decided to exit any relationships involving California," said Andrew Aquino, senior vice president. "We told our client to find a new source."


Questions and answers: IOUs

Q:What are state-issued IOUs?
A: They're promises to pay a certain amount of money plus interest. By issuing IOUs, the state can hold onto cash to pay state workers and cover other debts. The interest rate will be set today as will the maturation date, which will likely be about 90 days from now.

Q:Has this been done before?
A: In summer 1992, Gov. Pete Wilson issued about $4 billion in IOUs. However, since then, the federal courts have ruled that it is illegal to issue IOUs to state workers. The Constitution also gives priority to debt holders and schools. Officials must continue to pay into pension plans, in-home supportive services and Medi-Cal providers. Businesses with state contracts and taxpayers awaiting refunds are among the likely recipients of the IOUs. Earlier this year, the state delayed some payments but did not issue IOUs.

Q:Can you sell or cash an IOU?
A: While the state won't redeem them before the maturity date, they likely will be accepted by some banks and credit unions, which will pocket the interest after maturation. Some large banks have not yet decided whether to accept the IOUs as if they were regular checks.

Q:What if the governor and Legislature agree to a budget solution after the IOUs are sent?
A: The state controller decides when to stop issuing IOUs. However, a budget fix doesn't mean you could cash an IOU early. You'll still have to wait until the maturation date to redeem the IOU if your bank refuses to cash it before then.

Q:Who should I complain to about this?
A: Your elected officials. The governor's office telephone number is (916)445-2841. Find the contact information for your state senator and Assembly member at leginfo.ca.gov.

[Francois Cellier]

From BBC News

US states face budget meltdowns

By Steve Schifferes
Economics reporter
BBC News
Page last updated at 11:29 GMT, Thursday, 2 July 2009 12:29 UK


Fourth of July celebrations will take place across US cities and states on Saturday to celebrate American independence day. But they are likely to be subdued, with many cities cutting back or eliminating the elaborate firework displays that have been a key feature of the celebrations.

It is the latest sign of the fiscal crisis that is spreading across the nation as the recession has had a dramatic effect on state spending.

The state of California, with a GDP larger than most countries, has been among the hardest hit.

On Wednesday, it said it would start issuing IOUs rather than cash payments to its creditors after the state legislature failed to agree a budget deal.


State spending

The 50 US states play a much more important role in the US system than local authorities do in a European context. Together they make up about one-third of all public spending, or 10% of US GDP.

Most spending on schools, roads and welfare support is made at the state level.

And the states also have an important constraint that the Federal government does not - they have nearly all passed laws in the past 20 years requiring them to have a balanced budget, and forbidding them to borrow money to pay for current spending.

This has hit them very hard as the US recession starts to bite.

States rely on sales taxes and property taxes at the local level to fund much of their spending.

These revenues have plunged as the economy has gone into freefall.

At the same time, they have faced higher bills to pay for the casualties of the recession.


California dreaming

California, the biggest and richest state in the US, has been particularly hard-hit.

It has an unemployment rate of 11.5%, well above the US average, and has been at the centre of the sub-prime mortgage crisis, with more properties foreclosed than in any other state.

Several of its biggest banks, including IndyMac, have been taken over by the federal government, and its manufacturing sector has been hard-hit by the crisis.

It also has more poor people and immigrants than other states.

So California faces a $26bn (£15bn) deficit on its general budget of $96bn.

But it is not alone.

According to the Center for Budget and Policy Priorities (CBPP), a Washington think tank, 48 of the 50 states are facing budget deficits this year, with a total deficit of $166bn, or 24% of their budgets. And it projects an aggregate deficit of $311bn by 2011.


Political deadlock

With the new fiscal year for most states beginning on 1 July, their state legislatures have been under pressure to agree and package of higher taxes and fees, and cuts in services to balance their budgets.

Seven states have failed to reach agreement on a new budget - including many of the big industrial states such as Illinois, Ohio, and Pennsylvania, as well as Arizona, also hard-hit by the sub-prime crisis.

They are being forced to resort to measures such as asking banks to loan state workers their wages (in Pennsylvania) to a one-week temporary spending bill (in Ohio).

The political deadlock is not surprising. Few legislators would like to raise taxes in the recession, rejecting, for example, Arizona governor Jan Brewer's request for a temporary increase in the state sales tax.

But about half of all states have raised taxes or increased fees already this year, according to research by the CBPP, while 12 are considering such measures.

The peculiarities of California's political system have made the deadlock particularly difficult to break in that state.

Passing a budget bill requires a two-thirds majority. But any compromise has been made more difficult because boundary changes have given most legislators in California safe seats with little chance of being unseated in an election - thus entrenching traditional party positions.

So far California Democrats have rejected the deep cuts in services and "revenue enhancements" (higher taxes) proposed by Republican governor Arnold Schwarzenegger and suggested $11bn in cuts instead, a plan the governor says he will veto.

And California voters rejected all the options for raising more revenue put to them in a recent referendum.


Impact on recession

But with no budget agreement, many states will have no choice but to reduce services and lay off government employees, as well as playing for time with temporary fixes.

Already there is evidence from across the country suggest that services are being cancelled, from ending the summer school programmes for 14,000 children in Brevard County, Florida, to closing state parks in California, to reductions in eligibility for health care coverage in New York.

In California, its budget woes mean that:

• Hundreds of infrastructure projects - road repairs, water maintenance, etc - have been shelved, along with the thousands of jobs they promised
• counties and state suppliers have not been paid for services they provide
• thousands of Californians who were looking forward to tax refunds, have not received them and will not do so in the foreseeable future
• 20,000 state workers may be laid off and many more will be required to take unpaid leave

The reductions in state spending will also have a negative effect on the economy, deepening the recession in states where the cuts are most severe.

It was concern about such economic effects that led the Obama administration to include substantial aid to state budgets in its $787bn fiscal stimulus plan that was passed by Congress in February.

But relatively little of the promised money has arrived yet, and meanwhile the speed and scale of the downturn has made their fiscal position much worse.

According to Todd Haggerty, an analyst with the National Conference of State Legislatures, there have not been so many states without budgets since 2003, another recession year.

The schools superintendent in Brevard County, Florida, Richard DiPatri said he had no choice but to cut the summer school programme despite its academic benefits.

"Last year in Florida, our funding just went off the cliff," Mr DiPatri told the New York Times.

With many economists predicting that any recovery in the US economy will be weak and slow, the budget woes and political problems of the states are likely to continue for some time.

[potter]

So the deadbeats get cash...and those providing a legitimate service or product get IOU's?

How fucked up is that?

[Tom Joad]

The budget shortfall is $42 Billion.

To use Cat's expression, It's a great big shit sandwich and everyone needs to take a bite.

They need to cut spending by $21 Billion and raise taxes by $21 Billion.

Lock the legislature and governor up in one big room provide day old bread and water and don't let them out till they do it.

[potter]

In preparation for budget cuts here in Kansas, the daily rag has been featuring "woe is me" front page articles of people on the dole who will lose their free ride. Yesterday featured a pudgy 20 something woman with bleached and permed hair and big old tattoos on her arms. She seems to be eating well and certainly must have money to blow. She's claiming PTSD (the "difficult ti disprove on the dole complaint of the day")

Shes' just one of a string of seemingly healthy and able bodied adults, like my neighbors, whining because their time on the dole is coming to an end.

What I'm coming to realize is that those with real reason to be on the dole...mental illness, or permanent injury, seem to do everything they can to hold down a job and make themselves useful..even if it's count work......leaving the deadbeats who really just don't feel like working to whine about wanting to be on the dole....

[Tom Joad]

Originally Posted by potter

In preparation for budget cuts here in Kansas, the daily rag has been featuring "woe is me" front page articles of people on the dole who will lose their free ride. Yesterday featured a pudgy 20 something woman with bleached and permed hair and big old tattoos on her arms. She seems to be eating well and certainly must have money to blow. She's claiming PTSD (the "difficult ti disprove on the dole complaint of the day")

It's so true Potter.

Why is it that all these Bozo's look like extras from the cast of "Road Warrior"?

[Yorkist]

So that you can sneer at them with impunity and feel superior?

[potter]

Originally Posted by Tom Joad

It's so true Potter.

Why is it that all these Bozo's look like extras from the cast of "Road Warrior"?

I hadn't thought about it...but that exactly what these people look like.

Meanwhile, the "mentally challenged" and truly disabled people hold down jobs at fast food, hotels, offices, wherever they can find something to do...at pretty much any salary....

It's gotten to where you know who the fakers are because they are actually on disability. The truly disabled and mentally ill are too proud for that shit.

[Sir Digalot]

and the brits are complainong about a measley 42 million for the royal family...

see chump change *LOL*

[Tom Joad]

Originally Posted by Yorkist

So that you can sneer at them with impunity and feel superior?

Yeah, that's it.