Reuters BlogSACRAMENTO, California (AP) - California's controller will start paying many of the state's bills with promissory notes as soon as Thursday after lawmakers failed to close the state's worsening budget deficit, adding a new measure of indignity to a state sinking deeper into dysfunction.
Lawmakers' failure to act on Tuesday, the end of the fiscal year, also widened California's deficit from what already had been a whopping $24.3 billion - more than a quarter of its general fund.
The failure to balance the state's main checkbook prompted Gov. Arnold Schwarzenegger on Wednesday to declare a fiscal state of emergency.
Under the declaration, state offices will be closed three days a month to conserve cash. If the Legislature fails to solve the deficit within 45 days, it cannot adjourn or act on other bills until the crisis is resolved.
The partial government shutdown also will lead to a third furlough day for 235,000 state employees, bringing their total pay cut this year to about 14%.
FIND MORE STORIES IN: University of California | Bank of America | Arnold Schwarzenegger | John Chiang
"California needed the Legislature to act boldly and with conviction. Their response was not a solution to California's budget problem but an invitation to actually a bigger financial crisis," Schwarzenegger told reporters Wednesday.
On Tuesday, as the previous fiscal year was drawing to a close, the Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted. Passing those bills would have given the Legislature time to work out a broader solution to the deficit.
Instead, the budget shortfall is set to grow even wider because of California's complicated school funding formula, meaning the state will not have enough money to pay all its bills.
State Controller John Chiang said his office is prepared to issue promissory notes totaling $3.3 billion in July.
It will be the first time since 1992 that California will have issued promissory notes. The move is almost certain to further damage the state's credit rating, already the lowest of any of the 50 U.S. states, saddling taxpayers with billions of dollars in higher interest payments on bonds that have yet to be sold.
Issuing the promissory notes - formally referred to as individual registered warrants - also will have real-world consequences for those on the receiving end. Small businesses that rely on state contracts will be most affected.
The promissory notes also will be sent to California counties, which now must find other ways to fund a wide array of social programs, ranging from alcohol abuse and mental health treatment to services for the elderly and disabled. California's universities were evaluating ways to assist students whose grants will not be funded to pay education expenses.
It was unclear whether some of California's largest banks will accept the notes as payment. They would be paid back, with interest, but the state's precarious financial condition and legislative gridlock might be making some bankers nervous.
Bank of America announced Wednesday it would cash the state's promissory notes for its customers through July 10, bank spokeswoman Colleen Haggerty said. Schwarzenegger and state officials asked other banks to do the same, noting that California has never defaulted.
"We will make those payments," he said. "We are responsible."
I can't see how this can go pear shaped at all.Felix Salmon
July 1st, 2009
California: The haves and have-nots
People who get California IOUs
Grants to aged, blind or disabled persons
People needing temporary assistance for basic family needs
Persons with developmental disablities
People in mental health treatment
Small Business Vendors
People California pays in cash
University of California
Public Employees' Retirement System
Legislators, legislative employees, and appointees
Judges
Department of Corrections
Health Care Services payments to Institutional Providers
