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.

It has been truly depressing to watch the Twitter feeds of John Myers and Scott Lay tonight, as the mood shifted from guardedly hopeful to despairing.  The Senate keeps voting on things and not coming up with any solutions.  They tried to pass the stop-gap solution again, and came up short of the votes needed.  They passed the majority-vote budget with some fee increases, and the Governor vetoed them.  Let’s all please remember that.  With a stroke of the pen, the Governor could have ended this.

If SB 64 and SB 80 (the stop-gap) don’t pass by midnight (and actually, in an hour or so, because it takes a couple hours to prepare the necessary paperwork), the state will forfeit $3 billion in cuts to the 2008-09 budget year, which they will have to find in the following year, and a total of around $7 billion in total costs, when you add in the costs of additional borrowing, etc.

At some point, a large majority-vote budget (which wouldn’t take effect for 90 days), absent the tax increases, passed the Senate and moved on to the Assembly, where it will be voted on tonight.  According to Scott Lay, it covers all but $1 billion of the target, which is probably enough for the Governor to veto it.  Why, it’s almost as if he doesn’t want a solution but instead an opportunity to push through a bunch of long-sought goals shock-doctrine style!

The Senate just tried again to get the necessary votes for the stop-gap, and fell short by the exact same amount.  They’re in recess until 9:30 and will probably get only one more shot.

…we’re past 10pm at this point, the Senate has yet to reconvene, and by most calculations the die has been cast.  Enjoy your scrip!  Zed Hollingsworth has been spotted in the Governor’s smoking tent, for whatever that’s worth.  But the Governor remains intransigent and apparently determined to bring the state to complete failure.

…counting down the minutes until the end of the fiscal year is kind of like waiting for New Year’s, only it involves budgets and trailer bills and at the end people die.

…So the Senate is going back into session.  John Myers tweets: “Senate pro Tem Steinberg calls senators back..we’ve watched a lot of “shuttle diplomacy” betwn Dems, GOP, and Guv’s ofc. Still, long odds.”  We’re at T-minus 43 minutes.

…the way this is going from the Twitter feeds, Steinberg looks like he’s desperately trying to pass the stop-gap measures again.  The odds are long.  He pleads to the Yacht Party not to be party to irresponsibility.  I wonder what the response will be?… this: “Reeps still refuse to put up votes.”  Maldonado, in fact, won’t vote at all.  He’s just walking away.  Abstaining his way into oblivion.

…Democrats are spending a lot of time lobbying Leland Yee (who has been consistently voting against this stop-gap solution because it hurts schools too much) and Abel Maldonado (who isn’t voting), but of course even if they switched their votes that would leave the Senate one vote short of being able to override Arnold and put the stop-gap into effect.

…Republicans are playing their usual game of holding back all their votes until all the Democrats vote for something, so they’re waiting on Yee to flip.  But assuming he does in the next 20 minutes, who joins him?  Two GOP votes are needed.  Beyond Maldonado, who would change their vote?

…Yee just came back to the floor, I’d bet he’ll vote with the majority this time around, but time is running out… indeed, Yee votes aye.  Will there be a second Republican?  Or even a first?

…Maldonado still not voting on the three-bill stop-gap package.  10 minutes and counting…

…This is pretty much over.  At midnight, the state loses the equivalent of $7 billion in savings.  I will remind everyone that Senate Democrats, in the end, voted 25-0 for this deal; Republicans, 0-14 with 1 cowardly abstention (Maldo)… and Steinberg shuts it down.  It’s over.  IOUs will go out on Thursday, $7 billion wasted by the so-called fiscal conservatives.

Something’s a-stirring for the second straight night in Sacramento.  Scott Lay @ccleague and the indefatigable John Myers @KQED_CapNotes will have the best play-by-play.  The Senate has scheduled a session but immediately went into party caucuses for meetings.  If they do hit the floor, CalChannel will have it.

Basically, here’s the latest: The Senate and Assembly have already passed majority-vote budget revisions that would fill the current deficit, but the Governor has vowed to veto them.  The Assembly, with bipartisan support, passed three bills in a stop-gap measure, which would at least provide savings for $3 billion in fiscal year 08-09, which ends tomorrow, and would keep money flowing in state coffers for another few weeks, avoiding IOUs.  The stop-gap consists entirely of cuts and gimmicky delays in funding, by the way.  The Governor has no plan whatsoever to recoup that $3 billion if passage of the stop-gap fails by the deadline.

What the Governor has done is create a completely new budget plan with a day to go before the deadline.  Some would call that deliberate.  This “Plan B” budget would not eliminate Healthy Families, CalWORKS or Cal Grants, nor would it cut all funding for state parks, which was apparently a bridge too far.  It would accept the one-day delay in state employee paychecks from June 30, 2010 to July 1, “saving” the state $1.2 billion.  However, the new plan would borrow $2 billion from local governments, the maximum allowable under the old Prop. 1A; reduce state worker salaries, benefits and pensions; and make broader cuts over various different programs to make up the gap.

Schwarzenegger has appeared to back off from the worst cuts he proposed initially, a win for the grassroots and legislative Dems, but the steady stream of changes to his proposals, along with an insistence on the June 30 deadline for a full solution, have conspired to virtually assure that the deadline will be missed.  This is the backdrop for tonight’s Senate action.  If they can get two GOP votes for the stop-gap solution, they can actually override a gubernatorial veto and set into law something to at least extend the process by a few weeks.  I don’t know about the likelihood of that, but the choices have become limited.

Meanwhile, the Yacht Party made a tiny ad buy on the budget to try and get people to notice they exist.

I’ll monitor if anything interesting happens…

…from Myers: “One more night…to search our souls.” -Senate pro Tem Steinberg on Senate floor. No agreement tonite. New fiscal year about 26 hrs away.

…and it looks like nothing interesting happened.  They took a vote on the stop-gap, didn’t get the 2/3 required to override Arnold’s veto, and adjourned until tomorrow morning.  Looks like we’ll have late night with the legisature Day 3 tomorrow, as the midnight deadline looms.

The Senate followed the Assembly today by passing a majority-vote budget, mostly along party lines, that solves the entire current deficit and includes a large reserve.  The Governor has vowed to veto the package.  CDP Chair John Burton is asking for grassroots action to force the Governor into compliance, which I consider unlikely, but it’s worth reposting some of the letter for the perspective of Burton:

Late last night, Assembly Democrats passed a spending plan that minimizes the cruel cuts advocated by the governor by raising $2 billion in new revenue. Just a few minutes ago, Senate Democrats followed suit, passing a plan that requires Big Tobacco and Big Oil to share in the state budget sacrifice.

Speaker Karen Bass, President Pro Tem Darrell Steinberg and their caucuses should be commended for standing firm against the governor’s Draconian cuts.

In order to pass the plan, legislative leaders structured it to require a majority vote. That’s because Republicans have repeatedly refused to provide the handful of votes necessary to pass the plan with two-thirds support.

Disappointingly, Gov. Arnold Schwarzenegger has vowed to veto the Democrats’ budget plan, preferring to play a game of chicken with the budget. He and Legislative Republicans would rather strip health care from nearly one million children and close 220 state parks than ask corporate special interests to pay their fair share.

Now, the onus is on the governor and Republican lawmakers to explain to Californians why they would rather drive the state over a cliff than agree to a budget with a mix of cuts and new revenue.

Please, call Governor Schwarzenegger’s office today at (916) 445-2841 or (213) 897-0322. Ask the governor to sign this budget plan, which minimizes the cuts by sharing the sacrifice.

Echoing the theme, Sen. Steinberg said today, “Shutting down the govt is not the answer to solving CA’s problems.”  He also called on the Governor to “release the Senate GOP” and allow for a bipartisan vote on stop-gap measures, the same that passed the Assembly, to allow for continued negotiations after the June 30 deadline.

What is now at risk, in addition to the distribution of IOUs, are $3 billion in savings from the current fiscal year, savings that will essentially be lost with no deal by midnight tomorrow.

In a nutshell: the deficit solutions pitched by both Governor Schwarzenegger and Democratic legislators rely on a spending reduction of about $3.3 billion in the 2008-2009 fiscal year that ends on June 30.

That’s tomorrow at midnight. Once the new fiscal year begins, those savings are effectively gone.

$3 billion of those savings would come from K-12 and higher education. They are not popular spending cutbacks in education circles, but reflect the larger ‘all options are bad’ narrative that you’ve heard in all circles for the past several weeks. The final $300 million or so of current year savings come from a plan to transfer money away from local redevlopment agencies.

Budget staffers say it matters which budget year to which these spending reductions are attributed (2008-09 vs. 2009-10) — in large part because additional cutbacks in 2009-10 could complicate the already delicate issue of eligibility for federal stimulus dollars.

Immediate savings are important for another reason: they provide some breathing room for the cash-depleted state coffers and might lower or eliminate the need for Controller John Chiang to issue IOUs by week’s end.

With no stopgap, essentially lawmakers will have to find an additional $3.3 billion in the 2009-10 FY budget, on top of everything they’re already doing.  So the Governor not only threatens a government shutdown with his intransigence, he wastes the state an additional $3 billion dollars, in effect.

In case you weren’t following along in the middle of the night, Assembly Democrats passed a majority vote budget that solves the entire $24 billion dollar deficit, as the Governor requested.  Through a maneuver found legal and Constitutional by the nonpartisan Legislative Analyst, the Assembly added a $1.50 per pack cigarette tax, a 9.9% oil severance tax on producers, and a $15 surcharge in the vehicle license fee to fund state parks, in addition to the homeowner insurance fee to fund emergency response systems, which was included in the Governor’s initial budget revision.  The new taxes amount to $2 billion of the $24 billion solution.  The majority of actions in this alternative budget remain cuts.  And according to Noreen Evans, the Senate will take up this majority-vote budget later today.

The majority approach was not our first choice. We spent weeks in Conference Committee pursuing a bipartisan budget solution. But we have hit a wall. And, we cannot afford to wait any longer. We are 48 hours away from the state plunging into financial ruin. The Legislature has a duty to act with or without Republicans for the good of California […]

As the old saying goes: lead, follow, or get out of the way. By voting against cuts and revenues tonight, the basis of any budget, Republicans ran from their responsibility to govern.

We gave legislative Republicans a chance to lead with us through a month of public hearings in the Conference Committee. That was the opportunity to present alternative budget proposals. Republicans squandered this opportunity.

If the Senate passes this and puts it on the Governor’s desk within 24 hours of the deadline to stop the state from issuing IOUs, he will have a simple choice to make.  Will he shut down the government because he failed to get everything he wanted from the legislature?  I suspect he will, actually.  And indeed, he has issued a statement to this effect, saying that he wants a “budget that solves our entire deficit without raising taxes.”

That’s the short-term state of affairs.  Going forward, the process itself is fundamentally broken, a fact that the state’s political media class has decided to notice in a boomlet of “How to fix California” articles over the past week.  I look forward to those debates.  If the Governor vetoes this budget, he will be shutting down the government and forestalling the effort to finally reform the process.

…more from the Governor, as he vows to veto this bill, calling it “illegal,” which is pretty far.  It is worth noting that, since most of this budget revision would not take effect for 90 days because none of them received a 2/3 vote, it is true that such a solution would not completely impact the immediate cash-flow problem.  Although, you could argue that putting such a solution in place would allow the state to borrow from investors.

I certainly don’t remember this hand being tipped anywhere prior to tonight, but there’s some activity going on in the Assembly with the budget.  Democrats appear poised to pass a majority-vote solution on about $2 billion or so in taxes, using some tax swaps and fee increases to pass the taxes on oil severance and tobacco, among other things.  Added to the other $21.5 billion that could conceivably be passed under a majority vote, that would fulfill the Governor’s requirement that all $24 billion be included in whatever solution gets reached.  The expectation would be that the Governor veto this majority-vote fee increase.  However, with the IOUs at the ready and the tax increases so small relative to the total budget, one wonders if Schwarzenegger can get away with such a veto.  If on the off chance that Arnold does sign this budget, the whole thing would probably head to the courts.

It’s unclear if the Senate will follow suit tonight.  And all of this is happening in the midst of negotiating sessions with the Governor, called a “stick-and-carrot approach” by the SacBee (I always thought it was carrot and stick, but there you are).  The Governor, for his part, continues inserting unrelated items into the deal, like pension changes for state employees that even he acknowledges would not impact the current budget year.

…for those late to the party, a bit of an explainer on how the majority vote process works:

Sunday night’s package included a 9.9 percent tax on oil production, a $1.50-per-package tax on cigarettes, and a $15 per vehicle registration fee.

While tax hikes normally require a two-thirds’ approval, Democrats argued that by eliminating an 18-cent-per-gallon excusive tax on gasoline, the net revenue to the state becomes zero and thus doesn’t represent a tax hike. Sunday’s bills would then replace the excise tax with an equivalent fee, which Democrats argue does not require a two-thirds’ vote.

Perfectly legal, according to the nonpartisan Legislative Counsel.

…The Assembly passed the tax increase 44-30, with 6 not voting.  I’m assuming that the 30 no votes were the 29 Republicans and independent Juan Arambula, who announced that he would not support this part of the budget bill earlier in the night.  The Senate has adjourned but the Assembly appears to be plowing through their entire budget.  Interesting.

…You can watch the Assembly proceedings on Cal Channel, by the way.

I am working for the No on 1A Campaign, however, I am not working for any other No campaign. My opinions should not be construed to be those of the campaign, especially when it comes to the remaining measures.

Building off of Dave’s post earlier today, and Robert’s from yesterday, it is clear that the Yes on 1A campaign is doing its best to marginalize any opposition as “hyper-left.”  From our friend, Yes on Prop 1A consultant Steven Maviglio:

“The public screams, ‘Do your job! Govern!’ Steinberg calmly replies, ‘We are governing; we have made difficult choices.'”

Which apparently the hyper-left, along with the hyper-right, doesn’t seem to get. Neither side wants to compromise. With (sic) is what Steinberg and Bass have done, and is what leadership is all about, particularly when there’s a 2/3 budget requirement handcuffing their ability to push progressive values. (CMR)

Look, I understand what it means to compromise. I’m all for reasonable compromise where it makes sense.  But compromise for compromise sake, well let’s say it’s hardly guaranteed to ensure a winner.  (Two words: Missouri Compromise.)  But if we are going to complain about the constraints that 2/3 has shackled upon us, as Steve does, how are we going to add yet another constraint on top of the ones we have now? We are trading additional long-term dysfunction for the right to kick the can a few years down the road.

Furthermore, the “rainy day fund” won’t even be there to help us in our next bust cycle. Prop 1A’s requirement that money taken from the slush rainy day fund go only to one-time expenditures.  What made the San Francisco rainy day fund so successful was the flexibility to protect vital services, as in the case of the city granting SFUSD $11 million to save 130 teaching jobs.  But Prop 1A offers none of that protection for Californians and the services that we want to remain viable.

Despite everything else that has been or will be said, the fact is that Prop 1A still does not impact the budget for the next two fiscal years. Nothing, nada, zip, zero. While the Yes campaign is trying to make this all one big package, perhaps they should take Robert’s advice and focus on Prop 1C. That’s where the real money is, without quite the same level of dysfunction. While the Republicans wanted to slash through Prop 63 mental health funds (1E) and Prop 10 first five funds (1D), the real prize for them is the “spending cap” (Mike Villines words, not mine) contained in Prop 1A. That’s why they tied the additional out year taxes to the passage of 1A.

Compromise isn’t itself a governing principle, and the support of generally progressive legislative leaders doesn’t ipso facto make it “progressive.” As former Sup. of Pub. Instr. Delaine Easton pointed out, Prop 1A will leave us in a hole that we will not be able to dig out of. That’s hardly a compromise that progressives are clamoring for.

UPDATE: One more thing that I missed in Steve’s post, that we see in the latest Yes on Prop 1A ad, and that we see in Arnold’s rhetoric, the doomsday scenario.  At least they’ve taken off Arnold’s phony $50 Billion number, but the message is still the same. Vote for this or your children will be out on the streets, which will be falling apart and full of busted water mains because we can’t fix them, and they will be harassed by arsonists who can run free because we have no police or firefighters. Boogah-Boogah!

Dave pointed out the sheer ridiculousness of this fear mongering, but as it appears to be a central aspect of the campaign, it’s worth mentioning again. And as I mentioned above, Prop 1A, the gooey center of dysfunction in this tootsie pop, contributes not one dime in the next two years.  

Play doomsday all you want, but what does it have to do with Prop 1A? If they were so concerned about doomsday why didn’t their latest ad even mention the measures that actually bring in cash this year? Prop 1A has nothing to do with whether your teacher of firefighter has a job next week, or next month or next year. But the doomsday theme is an attempt to tie the lot of the propositions together, despite the fact that Prop 1A would do nothing to avert layoffs in the short-term, and over the long-term threatens to throw a wrench in how we provide services in California for decades.

Of course, it’s sheer cynicism, as Prop 1A has absolutely nothing to do with Props 1C, 1D, and 1E. Like the Governor calling George Skelton and asking him to dumb down the propositions for the people of California, this doomsday line demands that Californians cast an unquestioning eye upon these measures and take the Governor at his word. But given his track record, why should the people of California trust him or his fuzzy math?