If no deal is reached between the Governor and the Legislature in the next 14 hours, California will start to issue IOUs to companies that do business with the state (mostly small businesses), taxpayers expecting refunds, and agencies delivering assistance to the most vulnerable members of society – welfare recipients, the elderly, disabled and blind, and college students expecting aid grants.
The biggest variable with these IOUs is whether or not banks will honor them, a decision that they have yet to reach.
The deciding factor could be California’s banks. If they’re willing to honor the registered warrants, or IOUs, then the problem becomes manageable for the scores of small businesses and local governments that rely on dollars flowing from Sacramento. They’ll be able to cash the IOUs.
But if the banks resist, billions in state payments will be effectively delayed – putting renewed stress on a state and region already suffering from a deep recession. One Rocklin company, a temp firm that relies heavily on state business, has already laid off five workers in anticipation of a cash squeeze.
So far, no banks have committed to honoring the IOUs, said Hallye Jordan, spokeswoman for state Controller John Chiang.
She said banks are probably waiting to see how much interest the state will pay on the IOUs – a figure that won’t be decided until Thursday, the same day Chiang is scheduled to issue IOUs. The notes will total $3.36 billion, with about $500 million targeted for the private sector.
In 1992, banks generally honored the IOUs by cashing them on demand. If you haven’t heard, banks are in a slightly worse financial picture now than then, and might not be willing to float bridge loans for the state, even with generous interest, this time. And of course, if the banks agree to honor the IOUs, the state will be paying out hundreds of millions of dollars to them in short-term interest.
If the banks fail to honor the IOUs, you can just add that to the severe pain being felt by California residents at this time. The personal bankruptcy filings which soared in Southern California in the first quarter will only increase. The foreclosures, which have not only continued for residences but commercial property like hotels, will expand. With small businesses forced to cut back due to cash flow cutoffs from the state, expect more unemployment and a continued erosion of the tax base, leading to even larger budget shortfalls. This is a death spiral from which we will find it hard to extricate ourselves. California’s role as the biggest of the “50 Herbert Hoovers” truly can threaten national economic recovery.
There’s another big difference when the state issued IOUs in 1992 and now: Then, the big banks (BofA, Wells Fargo, Security Pacific, First Interstate, Great Western, Home Savings, etc) were locally-run and significantly all of their business took place within California. They had to take the IOUs. By the first week of August Wells and BofA flexed their muscle by no longer accepting the IOUs and within days there was a budget agreement.
Today, of the large banks only Wells Fargo is based in California but they have nationwide operations. BofA is in North Carolina and (to borrow a phrase) it doesn’t move them one whit if California is in trouble.
At times I feel like we should be twittering messages to activists in Iran with the hope that they might help us get some focused coverage of what’s happening in California.
I’d love to know how Maria Schriver lives with herself, knowing that her husband is actively engaged in undermining every major policy goal on the agenda of the candidate she so emotionally supported!