SAN FRANCISCO - California Controller John Chiang yesterday said that the state will begin paying some of its bills with IOUs next week unless lawmakers quickly repair the state's unbalanced budget.
Chiang announced the plan yesterday, as the Assembly and Senate launched floor debates over a budget-balancing package proposed by the Democratic majorities in each house to resolve the $24 billion budget gap projected for fiscal 2010.
The plan, which featured fewer cuts than that proposed by Republican Gov. Arnold Schwarzenegger, was not expected to pass as proposed due to Republican opposition to $2 billion of tax increases and more one-time measures.
Chiang and Treasurer Bill Lockyer have warned that a plausibly balanced budget is needed by June 30 in order for California to be able to persuade investors to buy cash-flow notes before the end of July, when the state's cash position is projected to go negative.
In order to prepare for that possibility, Chiang said his office will begin issuing registered warrants on July 2 to private businesses, local governments, and owners of unclaimed property owed money by the state government, as well as taxpayers due income tax refunds.
The registered warrants are "promises to pay" such debts with interest, according to the controller's office.
Chiang said issuing registered warrants to lower-priority creditors will allow the state to preserve cash needed for payments prioritized by the state constitution and court rulings, to K-12 education, debt service, payroll, pensions, in-home supportive services, and Medi-Cal providers.
Registered warrants would be redeemed by the treasurer's office on Oct. 1, assuming there is sufficient cash available.
California last issued registered warrants in 1992.
"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Chiang said in a statement. "Unfortunately, the state's inability to balance its checkbook will now mean short-changing taxpayers, local governments, and small businesses."
The state's approaching cash crunch has led all three major rating agencies to put California's A-level general obligation ratings on negative outlook or watch since the end of May. Both Moody's Investors Service and Standard & Poor's warned that the issuance of IOUs was likely to trigger downgrades.
As if to emphasize California's revenue shortfalls, Standard & Poor's yesterday placed its underlying A-plus rating for the state's economic recovery sales tax bonds on CreditWatch with negative implications, because of information from the state that it intends to draw from the bonds' reserve July 1 and next January to make debt service payments due to declines in sales tax receipts.
Those bonds, issued in 2004 and 2008 to finance accumulated deficits, are repaid using a dedicated quarter-cent sales tax. They are also backed by a GO pledge.