CALIFORNIA COULD BEGIN ISSUING IOUs AT THE END OF JUNE

BY STEVE WEIGAND

June 15 is usually recognized around the Capitol as the day on which the Legislature thumbs its collective nose at a constitutional deadline that a state budget be passed.

That’s how it’s been celebrated on 29 of the past 33 June 15ths.

This year, however, there’s a twist: Lawmakers have already approved a budget for the fiscal year that starts July 1 – in fact, they did it in February.

But they’ve been unable to mend a $24 billion rip that has appeared in it since then – and that could cause as much trouble as if they were still squabbling over the budget itself.

That’s because without a budget patch in place by the end of this month, state finance officials say there’s a chance state government might have to do what it hasn’t done in 17 years: issue IOUs instead of paying its bills.

“This week I sat down with the controller and also with the treasurer,” Gov. Arnold Schwarzenegger told a Southern California audience on Friday, “and we all agreed that after June 15, every day of inaction jeopardizes our state’s solvency, and our ability to pay schools and teachers, and to keep hospitals and ERs open.”

The actual fiscal jeopardy is neither that dire nor that simple, but it’s still serious.

In most years, state government has to borrow money during the first part of the fiscal year to tide it over until tax revenue catches up with the bills in the last half of the year.

Also in most years, legislators and the governor drag out the fight over adopting a new state budget until after the fiscal year has started. Until a budget is in place, the state can’t borrow money.

Instead, the controller’s office is forced to delay payments to various creditors. The decisions on who gets paid and who doesn’t are determined in part by the state constitution (schools and bondholders get paid first); in part by federal law (state employees can’t be paid in IOUs), and in part by any court edict that has ordered the state to pay someone.

Everyone else – companies that do business with the state, students who get state aid, local governments, taxpayers awaiting refunds – has to wait.

But this is not a normal year, for a number of reasons.

One is that the major banks and Wall Street investors that California usually borrows from have been so battered by the worldwide recession that just having a budget in place isn’t good enough for them to lend the state money: they want it balanced, too.

Tom Dresslar, spokesman for Treasurer Bill Lockyer, said the state could probably squeak through the first few months of the fiscal year by borrowing from $7 billion to $9 billion.

“But to do that will take a credible $24 billion solution by the end of June, and the solution should include the governor’s reserve number” of $4.5 billion, Dresslar said.

Another reason the cash vise is tighter this year is that the state has already maxed out its internal borrowing from funds set aside for special state programs.

In addition, tax revenue continues to come in at lower-than-expected levels, a sign that California’s economic woes have yet to hit bottom.

State Controller John Chiang has forecast that absent a budget deal that allows borrowing, the state will be in the red by July 28.

And last week, the governor took one stopgap tool off the table, saying he would not approve the issuance of revenue anticipation warrants, or RAWs, if the budget is not balanced by July 1.

The warrants are costly financial mechanisms that allow the state to borrow even when the money can’t be repaid in the same fiscal year. The last time California issued RAWs was in June 2003, in the midst of another bitter budget fight.

Schwarzenegger said that issuing RAWs would only prolong the hard decisions on program cuts that legislators are facing.

“I’ve heard accusations that I tried to shut down state government,” the governor said Friday. “I don’t have to shut down state government, because when they don’t produce a budget on time we will run out of cash and therefore our government will shut down by itself.”

Absent either a budget deal or the sale of RAWs, said Hallye Jordan, spokewoman for state Controller Chiang, the options are to delay payments, or issue the equivalent of IOUs, called registered warrants.

In February, Chiang withheld $4.1 billion in payments for 30 days, while legislators and the governor hammered out a deal that temporarily closed a gaping budget gap.

But the state is even more strapped for cash now than it was in February. That, Jordan said, “means we may have to go straight to registered warrants. That’s something that we are looking at daily.”

The last time the state issued registered warrants – and the only time since the Great Depression – was 1992, when the state handed out 1.6 million warrants worth a total of $3.8 billion over a two-month period.

State financial officers say that issuing registered warrants would make it even harder to borrow from commercial markets and private investors – and nearly impossible without a balanced budget in place.

“If we are without a budget,” said Mike Genest, the governor’s director of finance, “we would be going to the market and saying ‘well, we’re still haggling over the budget, there’s no political agreement, we’re still spending $24 billion more than we’re going to have and we don’t know what we are going to do about it, and oh by the way, the year after that is going to be worse … so in reality our chances of paying you back are murky at best … but hey we’d like you to loan us the money anyway.’

“Now, there is probably somebody out there who would lend us the money, but there are only so many suckers in the world, so we’d probably only end up with a billion or so.”

See Related: BUDGET CRISIS

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