California Has to Delay Bills to Avert IOUs, Controller Says

Monday, 04 October 2010 04:01 PM

Oct. 4 (Bloomberg) -- California may have to issue IOUs unless lawmakers agree to delay paying some of the bills that accumulated as Governor Arnold Schwarzenegger and legislative leaders negotiated a budget compromise, a spokeswoman for the controller’s office said.

The deferrals are needed because California racked up $8.4 billion of delinquent bills as it operated without a spending plan for more than three months, said Hallye Jordan, spokeswoman for Controller John Chiang. That’s more than the $5 billion bridge loan Treasurer Bill Lockyer is lining up from a group of Wall Street banks to tide the state over.

Schwarzenegger and top lawmakers said Oct. 2 that they agreed on how to close a $19.1 billion deficit and end a stalemate that has left the most populous U.S. state without a spending plan since the July 1 start of its fiscal year. Chiang said repeatedly that a prolonged impasse could force him to issue IOUs for a second-straight year in order to conserve cash to make priority payments such as debt service.

“Nobody wants to do IOUs because of the damage it will do to our credit ratings right as we will need to borrow,” Jordan said. “IOUs are an option nobody wants.”

The governor and the legislature must approve delayed payments, Jordan said. Chiang hasn’t decided how many or which bills to recommend they put off paying, Jordan said.

Better-than-expected tax receipts from September and significant savings built into the budget may lower the amount that needs to be put off, she said. The state’s cash purse will drop to about $1.2 billion by Oct. 28, she said.

Deferred Bills

Lockyer has said he will repay the bridge loan with proceeds from the sale of about $10 billion of revenue anticipation notes, a type of short-term tax-exempt municipal bond that states and local governments commonly use to pay bills until tax revenue arrives later in the year.

Those notes would likely be sold within six weeks of budget passage, according to the treasurer. He hasn’t been able to borrow the money because the promise to repay the notes must be included in the budget.

State finance officials already deferred paying $2.9 billion of subsidies to schools and counties in September to make sure there’s enough money for bondholders. That was on top of $3.2 billion the state pushed back in July.

Lawmakers and Schwarzenegger, a 63-year-old Republican, refused to disclose details of their deficit-cutting agreement. They did say the accord doesn’t raise taxes, as sought by Democrats, nor does it dismantle the state’s welfare system, as proposed by Republicans.

Budget Process

A public hearing on the proposal is scheduled for Oct. 6, with Senate and Assembly votes planned the next day. California requires a two-thirds vote in both houses to pass budgets, and neither party holds enough seats to meet that threshold.

California, with the world’s eighth-largest economy, issued $2.6 billion of IOUs last year after a similar stalemate. That was only the second time since the Great Depression that the state had to use warrants to cover costs and conserve cash. Fitch Ratings and Moody’s Investors Service cut the state’s credit rating when the IOUs began last year.

The state’s constitution says lawmakers must send a budget to the governor by June 15, about two weeks before the start of the fiscal year. The Legislature has met that deadline five times in the last 30 years. The fiscal 2008 budget was sent to Schwarzenegger on Sept. 16 of that year and signed into law on Sept. 23, the latest the state went without a spending plan until this year.

In January, Standard & Poor’s cut California’s credit grade to A-, its lowest among U.S. states, citing fiscal imbalances and recurring cash-flow problems. S&P has said it may reduce the state’s rating again if the budget crisis worsens.

--Editors: Stacie Servetah, Stephen Merelman

To contact the reporter on this story: Michael Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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Oct. 4 (Bloomberg) -- California may have to issue IOUs unless lawmakers agree to delay paying some of the bills that accumulated as Governor Arnold Schwarzenegger and legislative leaders negotiated a budget compromise, a spokeswoman for the controller’s office said. The...
Monday, 04 October 2010 04:01 PM
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