California may have to issue IOUs because of the $24 billion deficit. The IOUs may be issued as early as July 2. Because of the state's financial difficulties, Controller John Chiang warned that he would have to start issuing warrants instead of money as both houses started debating solutions to the budget problem. If California IOUs start to replace actual cash, who would suffer?
According to the LA Times, some of the agencies receiving California IOUs in lieu of cash as a result of the budget deficit would be county social service agencies, private contractors, state vendors and Californians entitled to income and corporate tax refunds.
This week, Chiang met with legislative leaders and Governor Schwarzenegger with warnings of the consequences that may come as a result of further delays in solving the budget problems. One of these was that California may have to start issuing IOUs instead of real money.
In February, Controller Chiang was forced to delay outgoing payments for an entire month. The economy has continued to decline since. Chiang said that this type of budget deficit has not happened since theh Great Depression. By July, the deficit is expected to reach $2.8 billion. By September, it could grow to $6.5 billion. California giving out IOUs may be only the beginning of a potentially disastrous cash crunch for the state.
According to the Wall Street Journal, the IOUs that California may have to start issuing would carry an interest rate that has not been specified. They would be issued for all general fund payments other than those categories protected by the state constitution, federal law and court decisions.
KGET.com reported that Chiang stated that "the State's inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses." California may have to start issuing IOUs partially because of a lack of better options - a temporary issuance, such as the one in February would not be successful this time, according to Chiang, and the Governor took the option of pursuing short-term, high-cost loans from Wall Street to cover the cash shortfall off of the table already. It seems like those of us in California who are payed from federal funds may need to keep our ears tweaked to news about the potential IOUs, so as to not be taken by surprise next week.
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