Gov. Seeks to Avoid IOUs for Taxpayers, Vendors

Controller warns state may be cash strapped as soon as February

By PATRICK HEALY and ASSOCIATED PRESS

Updated 6:33 PM PST, Wed, Jan 7, 2009

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SACRAMENTO, Calif.-- Gov. Arnold Schwarzenegger said Wednesday that he'll restart stalled budget talks with legislative leaders in hopes of getting a quick deficit-cutting agreement that would save the state from having to issue IOUs to vendors and taxpayers expecting refunds.

"Everyone makes New Year's resolutions," Schwarzenegger told reporters during a news conference. "So here's a chance to say, 'Let's start a new year here. We have a huge budget deficit. We have three weeks before we go off the cliff and before we have to hand out those IOUs. Let's do it."'

The Republican governor said he would meet Thursday with the two top Democrats and two leading Republicans to try to reach an agreement before the state is forced to start issuing promissory notes and laying off some state workers in February.

California has not resorted to IOUs since the 1992 budget crisis, when Pete Wilson was governor. Back then, about 100,000 state employees got IOUs instead of paychecks for two months until the state approved a budget. The 1992 crisis came during summer, well past the tax season, but at least 12,000 tax refunds were also issued as IOUs, according to a report in the Los Angeles Times.

Gov. Wants to Avoid IOUs

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Gov. Wants to Avoid IOUs

State workers filed a lawsuit, arguing the IOUs violated the federal Fair Labor Standards Act. They were awarded damages. In this current cash crisis, the California Controller's office expects that hourly state employees would continue to receive paychecks. But IOUs could be issued to elected state officials, including legislators and judges, and their appointed staff, some 1700 in all, "as well as tax refunds owed to individuals and businesses," according to aide Hallye Jordan.

Even without a deficit resolution, issuing IOUs is not the only option for tax refunds. The state could simply delay payment. Under the law, it has until May 30, Jordan said.

In 1992, banks honored the state's IOUs, cashing them on demand, and then receiving an additional 5 percent from the state when it made good on the obligations. In effect, the IOUs served the state as unsecured bridge loans from banks. But this time around, with credit tight and banks still feeling the impact of the fall meltdown in the financial services industry, it is not yet clear how banks will respond.

Schwarzenegger called Wednesday's news conference a day after vetoing an $18 billion deficit-cutting package passed by Democrats. Schwarzenegger said the Democratic plan was short on spending cuts and failed to roll back environmental reviews to speed up job-creating public works projects.

The governor and Democrats want a combination of spending cuts and tax increases to deal with a deficit that is projected to reach $42 billion over the next 18 months, but Republicans have balked at any tax hikes.

Democrats need at least three Republican votes in each house to put together the two-thirds majorities required to pass tax increases. Democrats attempted to get around that requirement in their $18 billion package by raising some taxes, cutting others and imposing a new fee on gasoline sales.

Republican lawmakers and taxpayer groups filed a lawsuit this week against the Democratic plan, contending it violated the two-thirds vote requirement.

Schwarzenegger recently released his own budget fix to cover the next 1½ years. He proposed $14.3 billion in tax increases and other new revenue, $17.4 billion in spending cuts and $10 billion in borrowing.