State's IOU Payment Plan to End Soon

The state's top money man said Thursday California will stop using IOUs to pay its bills.

Controller John Chiang said practice will stop the first week of September.  Chang's office said the state also hopes to repay the IOUs at the same time to businesses, taxpayers and municipalities that received almost $2 billion of the registered warrants instead of cash in the past months.

The practice of giving out IOUs has become the most visible symbol of the state's fiscal crisis.

"The state of California owes a debt of gratitude to the thousands of individuals and businesses that were forced to bear the brunt of the state's chronic fiscal mismanagement," Chiang said in a statement announcing his decision.

The move comes almost one month earlier than expected. 

Chiang added despite "this … shameful chapter in the State's history, it does not bring an end to our fiscal challenges."
The decision came after meetings between Controller John Chiang, Treasurer Bill Lockyer and Gov. Arnold Schwarzenegger's financial advisers, who needed to review California's cash flow and assess investors' appetite for buying California bonds.

When Schwarzenegger signed California's revised $85 billion budget two weeks ago, it gave the state the leeway to seek short-term loans to cover its daily expenses, ending the need for the IOUs.

Chiang said he is confident he will be able to get an interim loan of $1.5 billion by August 28, allowing the state to start cashing the IOUs given to individuals and businesses.

"Folks that have IOUs and haven't been able to cash them or deposit them with their banks, they'll be able to come into our office or send them in the mail and they'll get their money," said Tom Dresslar, a spokesman for Lockyer. "It will be like going to a bank. They'll get redeemed on the spot."

The state started issuing IOUs at the beginning of July, and they went to taxpayers who were owed refunds and state vendors that provide an array of products and services, such as office supplies, equipment and janitorial services.

The registered warrants carry an interest rate of 3.75 percent and can be redeemed starting Sept. 4, if a board Chiang sits on approves his recommendation next week, which is expected to be a formality. Several banks offered to cash them sooner but quickly halted the practice, and a market sprung up for investors some people ran online ads offering to buy the warrants from cash-strapped IOU holders, often at less than full value. There appeared to be few takers.

Chiang called the issuance of 327,000 IOUs totaling $1.95 billion a difficult and shameful chapter in California history and said the fiscal challenges continue.

"I urge the governor and Legislature to continue their efforts to fix the state's structural budget deficit and ensure we are never again forced to issue IOUs or delay payments to California families and small businesses."

Chiang issued the warrants as a way to preserve cash until California found a way to close a budget deficit projected at $24 billion through the middle of next year.

He said the IOUs allowed the state to save enough money to get through July, "but that came at great expense to California taxpayers, families and businesses."

State officials hoped the revised spending plan -- with deep cuts to children's health care, higher education and other state programs -- gives investors enough confidence in California to resume lending to the state. California has come to rely on taking out billions of dollars in short-term loans to cover payments during the first half of each fiscal year until most of its tax revenue arrives in the spring.

State officials want to avoid longer-term debt, especially since the fiscal crisis sent California's credit rating to the lowest of any state, which means borrowing will be more expensive.

The recession has hit California's economy particularly hard, leading to a 34 percent drop in personal income tax during the first half of the year. Even an agreement in February between lawmakers and Schwarzenegger to raise income, sales and vehicle taxes was not enough to keep up with the steep pace of decline, leading to the massive deficit.

The IOUs were needed until lawmakers brought state spending obligations in line with tax revenue, which they did with the revised budget. It was just the second time since the Great Depression and the first time since 1992 that the state has issued promissory notes instead of payments.

The latest state cash-flow figures suggest possible signs of life for California's economy, which accounts for 12 percent of the nation's gross domestic product.

While personal income taxes fell 11.5 percent in July compared with the previous year, sales taxes were up 20.8 percent, according to the controller's office. Corporate taxes rose by 9.1 percent from July 2008.

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