Money For Nothing
It was a busy second day of the new fiscal year at the printing facility tucked inside a quiet business park in a shaded east Sacramento neighborhood. But unlike most days, they weren't printing thousands of checks paid by the state of California.
This time, they were printing documents that aren't worth anything. For now, at least.
Today, for only the second time since the Great Depression, the state of California sent out a whole lot of promises to pay when it can -- more than 28,000 on this first day, IOUs totaling some $53 million. The budget crisis is about to hit home for a lot of folks waiting to be paid.
The printing of IOUs this afternoon, known in government-speak as registered warrants, pretty much was the culmination of a rare day in California budget battles. This morning, the state's top financial officials met to set both the interest rate and the date of repayment for the IOUs, which -- barring a deficit deal -- will total $3.36 billion by the end of July.
That meeting of the state's Pooled Money Investment Board was itself noteworthy. The panel of Controller John Chiang, Treasurer Bill Lockyer, and Department of Finance director Michael Genest is, to say the least, obscure. And yet this morning's meeting was standing room only, even though Lockyer and Genest sent advisers in their stead... Chiang was the only top dog on hand.
Chiang and Lockyer's representative prevailed in setting the interest rate of the IOUs at 3.75% and a maturity date of October 2. Genest's representative, Tom Sheehy (whose department is actually under the direction of Governor Schwarzenegger) pushed for a lower interest rate -- 1.5% -- and a repayment date as late as June 2010.
Let's step back a moment and consider that bit of information. Because the interest rate is based on a yearly accrual, and because the IOUs are only expected to be around for three months, the interest rate that was ultimately chosen is pretty low. On a $1000 invoice owed by the state, the payee would receive an underwhelming $9.38 in interest come October.
Schwarzenegger's advisers wanted that same $1000 to be held for as long as a year... at which point it would be worth $1015 (if paid back in three months, it would be $1003.75). That's an awful big favor that thousands of private companies, local governments, and taxpayers (awaiting tax refunds) would be giving to a state that doesn't seem to be able to handle its money very well. The Schwarzenegger team said their preferred plan (again, it was rejected by the controller and treasurer) was simply a way to preserve options for the cash-strapped state.
Chiang, in comments to reporters this morning, said what many might be thinking: the IOUs and the payback deal make California look... well... lousy.
"That's a sign to Wall Street that the state is in a state of fiscal mismanagement," said Chiang. "And that clearly creates implications for further downgrades of California credit ratings, which are today the lowest rated state in America."
For now, several financial institutions seem willing to go along, which means that folks who receive one of the IOUs might just be able to deposit them and go back to their normal lives; the banks that accept IOUs will be the ones that then collect payment plus interest from the state come October. Yesterday, Bank of America agreed to take IOUs; today, Wells Fargo followed suit. But there's a catch: the two big banks only signed on until July 10, just eight days from now. Any willingness to accept IOUs issued after that is still a crapshoot.
And the banks didn't miss an opportunity to take a jab at California's pols. "We join all Californians in urging our Legislature and Governor to take the appropriate steps as soon as possible to resolve this budget crisis," Wells said in a statement.
The interest on the IOUs doesn't come cheap; Chiang's office projects $25.8 million in interest costs for July's payments by the end of 90 days (they dispute an earlier projection from the governor's budget shop of $45.5 million in interest costs).
The creation of California's version of Wimpy's Promise (which was mailed with the above mea culpa letter) came at the same time private negotiations continued under the Capitol dome on a deficit deal. And while all say they're working to resolve their differences, it's clear Democrats still believe the governor could have avoided the IOUs.
"He dropped the ball in my opinion," Assembly Speaker Karen Bass told reporters this afternoon. "His actions led to the issuance of IOUs." And she didn't stop there, accusing Schwarzenegger of being primarily interested in "fixing his legacy."
As for the governor, he told a Fresno audience today that "the only thing (legislators) did accomplish was partial solutions that lack both the necessary cuts and the long-term reforms."
Neither house is scheduled to convene over the Independence Day holiday, though talks are expected to continue. Senate President pro Tem Darrell Steinberg has let his members go home, though instructed them that if called, they need to be back in Sacramento within four hours.
Meantime, the IOUs are in the mail and are already creating an odd atmosphere. As Bloomberg first reported today, the California scrip is already showing up on sites like Craigslist... with some folks buying and selling for souvenir purposes, and some possibly offering less than face value... a deal the more desperate IOU holders may be willing to make.