Businesses, Cities Feeling the Squeeze From State Budget Crises

from WSJ:

California's top accountant said the state would begin issuing IOUs to hundreds of thousands of creditors after lawmakers failed to meet its deadline this week to close a massive budget deficit.

California Controller John Chiang said Wednesday he planned to send out $3.4 billion of IOUs in July to state contractors and local governments, as well as to residents expecting income-tax refunds, welfare grants and college scholarships.

The decision to issue IOUs, officially called "individual registered warrants," will cost California heavily. The state will have to repay the warrants with millions of dollars in interest. Investors will likely charge California more for the short-term loans the state relies on every year as it waits for tax revenue. Issuing IOUs also sends a negative message to Wall Street about the state's financial shape.

Seven states failed to enact budgets before their new fiscal year, including Illinois, where Gov. Pat Quinn issued a veto.

California's economy, already hit by an 11.5% jobless rate and mass foreclosures, will feel the pain, although a few banks have committed to accepting state IOUs as payment. Most banks did the same in 1992, the last time Sacramento issued warrants during a budget impasse.

Mr. Chiang said without IOUs, the state would run out of cash by the end of July. "It's our last official step prior to defaulting," he said. Mr. Chiang delayed similar payments in February because of another cash-flow emergency, but didn't issue IOUs at that time.

Legislators have been deadlocked for more than a month on ways to close what is now a $26 billion deficit in a $92 billion general-fund budget. Late-night sessions failed to produce a compromise.

Republican Gov. Arnold Schwarzenegger proposed deep cuts and some so-called revenue accelerations, which would include larger income-tax withholding. Democrats, who control the Legislature, countered with a $21 billion proposal that includes $11 billion of cuts and relies more heavily on accounting gimmicks and one-time fixes. Republican lawmakers on Tuesday rejected the latest Democratic plan, which Mr. Schwarzenegger said he would veto anyway.

Meanwhile, small-business owners such as Manuel Belmarez are fretting over how to cope with payment delays from the state. Mr. Belmarez, of the Southern California city of El Centro, runs a family-owned medical-transportation business that takes patients to dialysis treatments. The state is his only client, and he nearly declared bankruptcy last fall when payments were delayed during the last budget stalemate.

This year, he said, he would have to shut down. "We just can't afford to go through the summer again like we did," Mr. Belmarez said. "I fell behind on my mortgage payments, had to get a home-equity loan." Mr. Belmarez said he would ask the county to take charge of the 100 patients he transports weekly, and would reopen his business in October, when the IOUs mature.

The IOUs may also mean more potholes in some cities. Local governments had been expecting $229 million from Sacramento in July, but will receive IOUs instead. Oakland City Councilwoman Jean Quan said that means Oakland will put a hold on all city projects that use state bonds, including parks, bike paths and road repairs.

Los Angeles City College will feel a similar squeeze, as it will dip into reserves to pay out college scholarships from the state that are administered locally. "We're hoping that the budget will get passed before we run out of money," said Jamillah Moore, the school's president.

Rebecca Kitchings, whose Meridian Food Services in Riverside provides cornstarch to state prisons for about $15,000 a year, said she was burned three years ago when she won a lucrative cheese contract, only to have the state delay payments for months because of a the budget holdup.

The state told her at the time it wouldn't pay up until the budget was passed. "All your other customers," she said, "you don't let them do that."