Deadbeat California may need to start issuing IOU's

SAN FRANCISCO (KCBS) -- If a new spending plan is not approved soon, California could start issuing IOUs after Feb. 1 to state employees, vendors, and even taxpayers entitled to refunds.

The last time Sacramento resorted to IOUs, officially known as registered warrants, was in 1992 when the state budget was 61 days overdue.

Although California is the world’s eighth largest economy by some estimates, the state’s credit rating is the lowest in the nation. Paper promises to pay up will not nudge it up from number 50.

“Every day that this budget crisis goes on is one more day when the state’s credit rating goes further and further down,” said KCBS political analyst Larry Gerston, a political science professor at San Jose State University.

Borrowing money would become even more expensive for California, and the state may find itself fending off litigation from contractors anxious to be paid on time.

State Controller John Chiang said the first to get a promise of payment rather than a paycheck would be constitutional officers, political appointees and legislators.

If you expect you'll be getting a refund from California when you file your 2008 state income tax return, be prepared: you may instead receive a "registered warrant." Translation: an IOU.

California is rapidly running out of money. Blame it on the state budget deficit that continues to bleed billions of dollars from California's reserves. Facing inadequate credit to make up the difference, California's Controller John Chiang warns that by the end of February, the nation's most populous state may not be able to pay some of its debts, and instead be reduced to issuing those creditors IOUs.

"My office has projected that, in approximately 60 days, there will be insufficient cash available to meet all expenditures reflected in the 2008-09 Budget Act," stated a Tuesday letter from Controller Chiang to the directors of all state agencies. "To ensure that the State can meet its obligations to schools, debt service, and others entitled to payment under the State Constitution, federal law, or court order. California may begin, as early as February 1, 2009, issuing registered warrants...commonly referred to as IOUs...to individuals and entities in lieu of regular payments."

California has not resorted to IOUs since the 1992 budget crisis when Pete Wilson was governor. Back then, some 100,000 state employees got IOUs instead of paychecks for two months until the state approved a budget. The 1992 crisis came during summer, well past the tax season, but at least 12,000 tax refunds were also issued as IOUs, according to a contemporaneous report in the Los Angeles Times.

State workers filed a lawsuit, arguing the IOUs violated the federal Fair Labor Standards Act. They were awarded damages. In this current cash crisis, The Controller's office expects that hourly state employees would continue to receive paychecks. But IOUs could be issued to elected state officials, including legislators and judges, and their appointed staff, some 1700 in all, "as well as tax refunds owed to individuals and businesses," according to Chaing aide Hallye Jordan.

The Controller himself remains in a Texas hospital where he was taken after falling ill during a visit with family. Chiang has remained in communication with his staff by phone, Jordan told NBC Los Angeles Tuesday evening.

The Controller's office will not take the emergency steps outlined in the letter to state agencies, Jordan said, if California can resolve its budget crisis in the next few weeks. But no new budget package has been proposed since the one presented by Democratic lawmakers was rejected by Governor Arnold Schwarzenegger as inadequate. "We've made very little progress the past couple of weeks," said Aaron McClear, an aide to Gov. Schwarzenegger, while the Governor was away from the capital on a holiday vacation.

Even without a deficit resolution, issuing IOUs is not the only option for tax refunds. The state could simply delay payment. Under the law, it has until May 30, Jordan said.

In 1992, banks honored the state's IOUs, cashing them on demand, and then receiving an additional 5% from the state when it made good on the obligations. In effect, the IOUs served the state as unsecured bridge loans from banks. But this time around, with credit tight and banks still feeling the impact of the fall meltdown in the financial services industry, it is not yet clear how banks will respond.

"Nobody's making any decision whether 'Bank X' will take the IOUs as money or not," said Brian Tobin, a Culver City based tax preparer. At the request of NBC Los Angeles, Tobin reviewed a copy of Chiang's letter. Tobin noted that in past years, California's Franchise Tax Board has processed electronic refunds in as short a period as a week. This raises the possibility that taxpayers with simple returns who file as soon as possible after New Year's may be able to receive refunds before the proposed February start date for issuing IOUs.

Those who could be most affected are taxpayers who routinely plan for large refunds as a means of saving for anticipated expenses, such as property taxes which are also due in April. But with notice coming at year's end, there is not time for those taxpayers to adjust their withholding or take other steps to try to capture their return in advance from the state's coffers. "They've got their money taken out of your paycheck. That's it," Tobin said.

One final irony, Tobin sees: electronic deposit refunds are inexpensive to do. Instead sending out IOUs is a more costly procedure for a state looking to save money.

IOUs happen every budget cycle since we recalled Davis for telling us that we had to pick between minimal taxes and minimal services or higher taxes and fuller services.

Personally, if I were king I'd make a law that anyone who voted for the idiot who got us in power had to be the first to suffer. So I hope the first IOUs go out to Orange County!

You gotta love what the City of Los Angeles is doing. They put a survey online asking city residents to vote for what services they think should be cut. I think that's a brilliant idea. It's well and good to talk all this blather about "fiscal conservatism" and "government has to live within its means." But it's stupid and meaningless when you really think about it.

I think every budget cycle, the people should have to vote. The ballot would look like this:

VOTE FOR EITHER A OR B

A
1% tax cut

B
Close 100 libraries

or

A
1% tax cut

B
20,000 kids will be denied admission to college

or

A
1% tax cut

B
If your house is burning down, don't expect a fire truck. Start peeing!

I think the real cost of tax cuts will be quite evident then.

California pays more in taxes to America than it gets back, unlike Texas, Louisiana, Alabama, Tennessee, Mississippi, North Carolina, South Carolina, Georgia, and almost all other red states.

Besides, TV and the hard disk drive were invented in California.

California pays more in taxes to America than it gets back, unlike Texas, Louisiana, Alabama, Tennessee, Mississippi, North Carolina, South Carolina, Georgia, and almost all other red states.

News reports commonly interpret this to mean that "red state" lawmakers are more successful at bringing home federal spending than "blue state" lawmakers. It's often suggested that the way to correct this imbalance is for "blue state" lawmakers to step up efforts to capture additional spending for their states, and for "red state" lawmakers to pare back their voracious appetite for ever-growing pork-barrel spending.

This interpretation may be appealing, but it's probably wrong. The much more likely factor driving the persistent imbalance between federal taxing and spending isn't the relative ability of lawmakers to "bring home the bacon," but is the fact that higher income states bear a larger fraction of the federal tax burden—an imbalance that is sharply amplified by the progressive structure of the federal income tax.

For whatever reason, so-called "blue states" tend to be high-income areas that pay the vast majority of federal taxes. Some 84 percent of federal individual income taxes—which account for over 40 percent of federal revenue—are paid by the those in the top 25 percent of the income distribution. The majority of these taxpayers live in wealthy, urban, politically "blue" areas like New York, California, and Massachusetts.

Even if federal spending were equal in all states, wealthy states would still send substantially more federal tax dollars to Washington than they received in spending, simply because they earn a majority of the nation's income. This disparity is greatly magnified by the progressive rate structure of the federal income tax, which taxes higher income states more heavily than low-income states, regardless of the level of spending received.

Still think the problem is not enough federal spending in "donor states"? Consider the table below. In 2004 federal discretionary spending was about $895 billion. How much would the largest "donor states" have had to receive in federal spending to boost their spending-taxing ratio to New Mexico's 2.0, the biggest "beneficiary state" that year?

As the table makes clear, far more than is realistically possible. California alone would need to receive more than half of the nation's discretionary spending. The lesson? The distribution of federal taxing and spending is mostly driven by tax burdens, not the ability of lawmakers to divert spending to their home states.

Besides, TV and the hard disk drive were invented in California.

Only 6 more weeks. Yikes. I don't like how Arnie is running things. Right now the guy is taking a vacation! But he does work for free.

Can you just picture people getting unemployment benefits getting an IOU?

Wow... maybe I'd be better off in Caifornia? We don't get many services, actually close to none, and our sales tax is 10% and the state is in a deficit of nearly 1 billion. I'd take Cali's climate and lifestyle over banjo's and deep-fried food anyday.

So last time IOU's were sent was under Pete Wilson... he was an (R), right? Odd coincidence there.

Wow... maybe I'd be better off in Caifornia? We don't get many services, actually close to none, and our sales tax is 10% and the state is in a deficit of nearly 1 billion. I'd take Cali's climate and lifestyle over banjo's and deep-fried food anyday.

A $1 billion deficit isn't that bad in the grand scheme of where many states are. Perhaps you should consider TX, as they have a lower sales tax and, like TN, no income tax. Plus they are running a huge surplus and have some cool cities like Austin and Dallas, and the really big sweaty metropolis of Houston.

What services do you need in TN? Police, Fire, Medical, Public schools?