Today is the first day that most large banks stop taking IOUs from individuals and small businesses.  For those left holding them, the options are limited.  Citibank agreed to a one-week extension, and Bank of the West will accept them – but only for existing customers.  Other big banks may offer lines of credit or other short-term bridges for customers, but on a case-by-case basis.  IOU holders needing cash might be able to try credit unions, or inevitably, check-cashing stores.  And this all appears to suit Arnold Antionette just fine:

State Treasurer Bill Lockyer tried to persuade the big banks to change their minds about the IOUs. “We’re just trying to convince them that it would be in the best interest of their customers and the best interest of taxpayers to give it more time,” said his spokesman Tom Dresslar.

Gov. Arnold Schwarzenegger made no such attempt at persuasion. “His focus is to get a solution to our budget so we don’t have to deal with IOUs,” said his spokesman Aaron McLear. “I don’t think it was anyone’s expectation that they would honor them forever.”

Emerging from a meeting with legislative leaders Friday, the governor would say only that “IOUs are one more reason to get the budget done as quickly as possible.”

In 1992, the last time the state issued IOUs, the major banks accepted them for about a month. Their refusal to go any further was widely seen as a move to pressure officials to pass a budget.

Yes, of course, this is why he vetoed solutions that would have stopped the issuance of IOUs in the first place.

Meanwhile, John Chiang’s latest release of the state economic picture shows a $10 billion dollar shortfall in Fiscal Year 2009, and a still-contracting revenue picture that has led to a $4 billion dollar delay in payments to local school districts.  They has planned on sending out the money Friday; now they will hold off until July 30.

And the Big Five have returned to the negotiating table today, where they claim “constructive” negotiations, which we’ve heard plenty of times before.  No word on whether the Governor continues to hinge a budget deal on uncorroborated fictions about fraud in social services or fiscally unwise cuts to programs like welfare.

Bloomberg reports that people are lining up for those souvenir Arnoldbucks.

Controller Chiang said the warrants can be transferred between individuals, setting up the possibility that a secondary market for the IOUs may develop. Already ads are appearing on Web sites such as Craigslist offering cash for the IOUs at below face value.

In such a transaction, the person who gets the IOU would get most of the cash they were due the state, while the person buying the IOU might then hold onto it until maturity and earn the face value plus the 3.75 percent interest.

At least one person offered to buy an IOU at more than face value as a keepsake.

“I am interested in purchasing a ‘State of California IOU’ as a souvenir,” the ad reads. “I figure it would be an interesting thing to have around when my grandchildren are fighting over my stuff after I’m dead and gone. I will pay two times face value (up to $100, or $50 face value) for a warrant/IOU.”

Of course, after July 10, the deadline that banks like BofA and Wells have given for exchanging these IOUs for cash, souvenirs may be the only value for these IOUs for a few months.  Maybe Arnold will go to a baseball card convention and sign them himself!

Here’s another FAQ about who receives IOUs and who does not.  The unemployed, SSI/SSP recipients, state employees and retirees, IHSS and Medi-Cal providers will NOT receive IOUs.  Welfare recipients, contractors with the state, local governments, and income tax refund recipients WILL get them.  Felix Salmon made a handy chart that suggest the haves will keep getting paid and the have-nots won’t, and that’s somewhat true, but some have-nots who have the benefit of their services being partially provided by the Feds will get paid as well.  In general, where you stand does depend on where you sit, in this crisis.  This again makes clear that the idea of California debtholders, who get priority of payment in the state constitution over everything but education, getting stiffed by the state is a ridiculous one that pretty much cannot happen, and lowering bond ratings should be rightly seen as Wall Street gouging.

And I’ll allow Karen Bass to explain exactly who’s responsible for this particular outcome of IOUs and lowered bond ratings.

Small businesses, students, seniors, and taxpayers will all start receiving IOUS. This shameful day didn’t have to arrive. In fact, Governor Schwarzenegger had several opportunities to prevent it.

On June 12 Governor Schwarzenegger unilaterally blocked the Controller’s authority to secure short-term loans to avoid the cash crisis. He said, “let them have a taste of what it is like when the state comes to a shutdown — grinding halt.”

On June 25 after the governor called Senate Republicans to his office for private meetings, $4 billion in immediate cash solutions that had been passed on an overwhelming bipartisan majority in the Assembly were killed in the Senate.

Most recently, the governor vetoed a comprehensive package of budget solutions supported by majorities in both houses of the legislature that would have resolved the $19.5 billion deficit, left a $4.0 billion reserve, avoided the cash crisis and prevented IOUs […]

We did offer, as a sign of good faith, to begin work immediately on reforms regarding restructuring Medi-Cal and eliminating fraud in the IHSS program. We also committed to working with the governor on other reform legislation for him to sign. But the governor wouldn’t take “yes” for an answer. So California businesses, taxpayers and students will be receiving IOUs simply because Governor Schwarzenegger thought it was more important to immediately force last minute changes such as reducing future employee pensions, fingerprinting elderly and disabled Californians who receive services, and denying kids food stamps if their families can’t access a computer to sign them up for the program.

See Noreen Evans for more.

The budget gap grows by $25 million a day and we have wasted billions of taxpayer dollars because the Governor wants to teach everyone a lesson.  I hope that IOU secondary market is bigger than eBay, because those suffering with the consequences of dysfunction are going to need the help.

The IOUs are on the verge of being distributed.  The Pooled Money Investment Board met today to hash out the terms for the IOUs, and surprise, there were some differences.  The Governor wants a paltry 1.5% interest rate for the IOUs, and flexibility on repayment until as late as June 2010.  That would be worse than a 1-year CD.  Controller Chiang supports the staff recommendation of 3.75% interest rates and repayment in October.  Chiang won.  The board approved his terms.

The reason to offer a more attractive interest rate is to ensure that banks will actually cash them.  Wells Fargo and Bank of America announced they will accept them, but only until July 10; after that, it’s anybody’s guess.  Golden 1 Credit Union and Tri Counties bank of Chico also agreed to accept the warrants.  This article gives a good rundown of how the IOUs will work.  If your bank won’t cash them, you’re basically stuck with a piece of paper until October.

The most important question, of course, is why we’re going down this costly route at all, when the Assembly and Senate Democrats fashioned a solution to avoid this.  The answer is that the Governor wanted some leverage, the people be damned.

If the stigma of issuing IOUs triggers a budget deal in the coming days, Gov. Arnold Schwarzenegger might find redemption in his strategy of quashing a stopgap solution that would have avoided those non-cash payments.

But if no budget deal emerges soon, Schwarzenegger will have helped saddle the state with a lower credit rating and have nothing to show for it.

As a negotiating strategy, Schwarzenegger is counting on public pressure to mount against the Legislature as California issues IOUs today for only the second time since the Great Depression. The Republican governor could have backed legislation to avert IOUs this week, but he demanded that lawmakers solve the entire budget problem, which grew Wednesday to $26.3 billion […]

Schwarzenegger wanted a full budget deal, and part of his calculation was likely that IOUs ramp up the stakes and force lawmakers to reach that goal sooner. Without IOUs, he figured lawmakers might have delayed compromise on the rest of the package, costing the state in a different way.

“If he had signed the stopgap measures, the Legislature would have gone home for Fourth of July weekend and come back when the threat of IOUs came up again,” said Tim Hodson, executive director of the Center for California Studies at California State University, Sacramento. “I’m sure the governor went over this and thought: Are the consequences of the delay worse, and would he have lost the leverage that he has now?”

Well, this is a game played with people’s lives.  If banks won’t cash IOUs, you can be sure Rite-Aid won’t accept them.  Or landlords.  Or health care providers.  In addition, this little power play cost taxpayers between $2 and $7 billion dollars, which I don’t see Schwarzenegger going into his wallet to cover.

Rather than shock doctrine the legislature into making major policy changes as a condition of passing a budget, a more likely scenario is that this train wreck will spark reform efforts to finally get off this perpetual track of hijacking and stubbornness.

If California has become ungovernable, and teeters now on the brink of bankruptcy, it is due less to excessive spending than a deficit in democracy – the very essence of which is majority rule. A simply worded, one-paragraph initiative to restore majority rule in the Legislature might well prove resoundingly successful with a crisis-weary electorate. And while it may not be sufficient in itself to repair the state’s balance sheet and fix its broken governance, restoring majority rule is the necessary first step toward ending gridlock, renewing public confidence, and preventing extremists of whatever stripe from holding future legislatures hostage to their own narrow agendas.

I will be discussing the budget crisis tomorrow morning at 7:00am on “The Morning Review,” with Roy Ulrich on KPFK 90.7 FM in Los Angeles.  You can listen live online here, and if you miss it in the morning an archive is kept here.

While I appreciate all these mailed-in press releases reacting to Arnold’s State of the State Address (shorter Arnold: not my fault!), I find them to be astonishingly ineffective.  Maybe they provide a good pull-quote or two for state media, but they do little to educate citizens about the state of affairs, because they are dryly forwarded to the same places to be seen by the same news junkies and nobody else.

In this respect I have to commend Assmeblywoman Nancy Skinner for an innovative way to connect with constituents and deliver a quick but important message on the budget crisis.

As your State Assemblymember from the East Bay, I am concerned about how the economic downturn is affecting our California communities. Job loss and foreclosures are at an all time high and our neighborhoods are hurting.

In Sacramento, I am working with state leaders on budget solutions that will preserve vital services, protect our children’s schools, and restore funding to shovel ready infrastructure projects that can put people back to work up and down our state.

With the enormity of Californias budget deficit such a solution requires a balanced package of spending cuts and new revenues.

But Governor Schwarzenegger has not been able to lead his own party to a reasonable compromise.

We can do better.

Join me, tell the Governor we can fix Californias budget problems without rollbacks to worker and environmental protections or devastating our schools.

Together lets move California forward.

Yes, it has the look and feel of a campaign ad.  And that’s the point.  This is a PERFECT way to use off-cycle messaging to make the case for a responsible budget solution.  And with a local cable buy (CNN, MSNBC, CNN Headline News, CNBC, Fox News, and Comedy Central), it is relatively cheap for Skinner to do so.  It’s not surprising that Skinner’s Chief of Staff is former California Progress Report editor Frank Russo.  He understands well that this kind of direct communication has been sorely lacking over the past few years.

In the coming months, as the crisis grows bigger, there’s going to be an effort by the Governor to use the bully pulpit to cast the whole thing as a problem of “the legislature” instead of laying the blame where it belongs.  It is crucial for progressives to push back against that, and Skinner has shown the way.  Of course, her Bay Area audience doesn’t really need to be convinced.  The Speaker or the Senate President Pro Tem or even the CDP should take this model and push it out in areas with close Assembly races last cycle or even just Republican communities.  That would be some forward thinking that would make the case for a responsible budget instead of ceding the territory to talk radio or worse.  It’s time for Democratic leaders to fill the news gap and begin to educate Californians.

The Governor is “restarting” budget talks today.  Of course, “restarting” should read “using the same failed process that cannot possibly be successful.”  The Governor vetoed the only game in town because he’s controlled by strings held by the Chamber of Commerce, who suddenly looked favorably on the virtues of bankrupting the state, and Arnold had to follow.  The SacBee ed board puts it more judiciously.

Democrats agreed to a 2 percent cut in welfare grants, and some, but not all, of the environmental exemptions. They also have insisted that the governor first negotiate with unions before attempting to furlough state employees and eliminate some paid holidays.

In an interview and op-ed in The Bee Tuesday, Senate President Pro Tem Darrell Steinberg suggested the deal blew up not because of policy differences, but because of political pressure placed on Schwarzenegger. Steinberg says the governor got “cold feet” over the Democrats’ plan to raise taxes and fees through a majority vote.

There may be some truth to this. On Tuesday, the California Chamber of Commerce issued a statement urging the governor to veto the Democrats’ plan, saying it included “unconstitutional and discriminatory tax increases.” Since the chamber is one of the governor’s few political allies, their stern opposition to increasing taxes by a simple majority vote may well have led Schwarzenegger to backpedal.

The ed board goes on to criticize Democratic leaders for not wanting to cut enough.  You know, I thought a mid-year budget deal was designed to fix the budget for the current fiscal year.  If we have two-year budget cycles now, it’s news to me.  I understand the logic of a two-year cycle, but the desire to fill an 18-month gap in January puzzles me and seems designed to further more draconian cuts.

And the continued ignoring of the elephant in the room and casting this as a failure of both sides to compromise is truly absurd.  There has been nothing but compromise coming from the Democrats, not just now but for years.  “Bipartisanship” has always meant “do whatever Republicans want” to the Very Serious Media.  George Skelton today is lamenting the loss of Leon Panetta, as if a guy telling lawmakers they should have more drinks together is the answer to every problem the state faces.

This isn’t rocket science.  Lawmakers aren’t allowed to do their jobs.  We elect a representative government along majority votes, and them load them down with rules that prevent majority rule.  It doesn’t take a genius – or even Leon Panetta! – to fix that.  Just an acknowledgement of the problem.

(Incidentally, a judge threw out the lawsuit from the Howard Jarvis crowd attempting to rule the work-around budget unconstitutional, since it was vetoed and therefore not germane.  If it comes to such a work-around again, however, expect more lawsuits.)