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California Budget Logjam May Spur IOUs Next Month, Chiang Says
California may begin paying bills with IOUs in September for a second year in a row as a legislative logjam over erasing a $19 billion deficit prevents passage of a budget.
State Controller John Chiang said the IOUs may be issued in two to four weeks if the budget impasse persists. The warrants will pay for everything from contracted services to health-care clinics so California can preserve funds to make payments on priority items such as bonds.
“I will not let the state of California become insolvent,” Chiang said today in a speech at the Sacramento Press Club. He said he is closely monitoring the state’s cash flow, which may flip to negative by late October.
California, the biggest issuer of municipal debt among U.S. states, hasn’t had a spending plan since July 1, when the fiscal year began. Governor Arnold Schwarzenegger and lawmakers remain deadlocked over how to fix the deficit. Without a budget, the state can’t sell short-term notes it typically uses each year to bridge cash shortages because an approved spending plan must provide for repayment of the borrowings.
“I am hoping we won’t need to issue IOUs,” Chiang said. “It’s an embarrassment to the state of California.”
In the absence of a budget, the state’s daily cash balance will determine when he must issue IOUs, Chiang said.
IOUs in 2009
California, with the world’s eighth-largest economy, issued $2.6 billion of IOUs last year after a similar budget stalemate. That was only the second time since the Great Depression that California had to use warrants to cover costs and conserve cash.
The warrants paid 3.75 percent, a rate set by the state’s Pooled Money Investment Board. To come up with the interest rate, state officials considered similarly rated short-term corporate and municipal notes. They also reviewed what California had paid on past short-term borrowings over a Thomson Reuters Municipal Market Data AAA rated benchmark, plus 250 basis points. A basis point equals 0.01 percentage point.
California’s fiscal situation puts the state at risk of having its credit rating reduced to “junk” level, which may push its borrowing costs to 20 percent or more, Chiang said. “It would place a tremendous tax burden on the people of California.”
“Not having a budget hurts our credit rating,” Chiang said. He said a downgrade “will force us to pay billions of extra in interest costs.”
The recession produced last year’s fiscal crisis in California, said Chiang, a Democrat who is seeking re-election.
Different Situation
“This year’s emerging cash crisis is fundamentally different,” he said, blaming it on the inaction of the Legislature and Schwarzenegger, a Republican.
Budgets and tax increases in California must pass the Legislature by a two-thirds vote. While Democrats control both chambers, they are short of that margin by two votes in the Senate and five in the Assembly.
Standard & Poor’s, which gives the state’s general- obligation bonds its fourth-lowest investment-grade rating of A-, said June 8 that California’s $69 billion of outstanding debt may be lowered if the impasse extends for as long as three or four months. Another $41.6 billion in tax-backed debt has been authorized, according to Treasurer Bill Lockyer.
To contact the reporter on this story: Michael B. Marois in Sacramento, California, at mmarois@bloomberg.net
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