TOPICS > Economy

Fallout Continues from California’s Budget Woes

July 14, 2009 at 6:40 PM EDT
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After failing to plug a $26 billion budget gap, California has begun sending out IOUs to cover its costs, but most banks are refusing to accept them. Spencer Michels reports on the ongoing financial crisis in the Golden State.

JIM LEHRER: Next tonight, bills are coming due in California and the state is having trouble paying them. NewsHour correspondent Spencer Michels has that report.

SPENCER MICHELS: State-issued IOUs are starting to show up in California mailboxes, and the recipients are having a hard time cashing them.

The state has been printing the IOUs since July 2. Ever since, people expecting an income-tax refund check have been annoyed and businesses and social service agencies have been disrupted and confused.

The state intends to issue a total of $3 billion in IOUs. They were needed because weary legislators working long into the night failed to approve a budget, leaving the state $26 billion in the hole and without cash. The IOUs pay 3.75 percent interest, and the state promises to honor them in October, if the budget allows. If not, the state could extend the redemption date.

The problem now is that most of the big banks stopped accepting the IOUs last Friday after cashing a few of them for three days. So vendors to whom the state owes money — companies that supply the state’s prison system, for example, as well as lawyers and service recipients — can’t cash the warrants.

The banks worry about the financial risks the state is asking them to assume, says Rodney Brown, president of the California Bankers Association.

RODNEY BROWN, president, California Bankers Association: The banks don’t really appreciate being put in this place where they are asked to basically become the bank to the people that the state owes money to; 3.75 percent is not really sufficient reward in the way of interest to compensate a bank for the risk.

SPENCER MICHELS: The state’s finance panel set the interest rate. It’s the first time since 1992 that IOUs have been issued. State Controller John Chiang said he had no choice but to use them.

JOHN CHIANG, California Controller: This impacts county governments who are providing social service programs. It’s going to impact the ability of childcare providers, the people who assist the disabled.

IOUs threaten to eliminate services

SPENCER MICHELS: Rob Repke is likely to be among the first affected. He's a 30-year-old developmentally disabled client at the Arc, a San Francisco center for people with disabilities. The person who helps him will now be paid partly with IOUs, which he won't be able to cash.

ROB REPKE: This guy comes to my house every couple of days and helps me out with basic stuff, you know, cooking, cleaning, bill-paying, balancing my checkbook.

SPENCER MICHELS: Repke, with cognitive disabilities and cerebral palsy, fears that many of the services he receives could be eliminated, as well as his state-funded part-time job.

Timothy Hornbecker, the Arc's CEO, says the IOUs have exacerbated an already bad situation and have become a symbol of a frozen state government.

TIMOTHY HORNBECKER, ceo, The Arc: The effect of the IOUs is almost a double whammy. We've just received a 3 percent cut and a 10 percent cut in funding for our services. And you add to that a delay in payment.

For example, our funding source, the regional center, will have less money to spend because they have to use their line of credit and have to use interest, so that means that we'll have to cut some of the services that we're offering.

SPENCER MICHELS: At the Arc, clients like Repke attend classes, this one in money management, and get group and individual help. The agency, which serves 550 people, has a yearly budget of $10 million, and most of that comes from a quasi-state agency called a regional center. That center is now being paid in IOUs.

Consequently, the regional center is having to depend on its line of credit, and that impacts the Arc, according to center director Jim Shorter.

JIM SHORTER, CEO, California Regional Center: For people who are vulnerable, who are very disabled, and for their family members, what they need from us is some sense of stability. And with these IOUs, it's on top of seven years of frozen rates to our system and then to say to them, "You can't even predict what's going to happen next week, because the state government can't decide on a budget," and it's going to be issuing pieces of paper instead of the money. It's very disconcerting for families, and it's certainly going to be disconcerting for the individuals that we serve.

Third parties offer to cash IOUs

SPENCER MICHELS: It isn't just the poor and disabled who are affected by the IOUs. Even attorneys who are appointed by the courts to represent poor defendants on appeal are concerned they won't be able to get their money.

Walt Pyle is the president of the California Appellate Defense Counsel, and he says he's received messages from more than 100 of his members who want to know how to cope with the IOUs.

WALT PYLE, appellate attorney: The kind of work we do, we represent poor people. Nobody gets rich representing poor people. Many of our people have no savings of more than a month or six weeks, and they're going to be really pressed to find the money to pay their bills, to pay their mortgage, to buy food for the family. Many of them have spouses that are out of work.

SPENCER MICHELS: With banks reluctant to honor state-issued IOUs, some Californians who need the money are turning to check-cashing stores, which are prominent in some poor neighborhoods. The irony is that those stores have relationships with banks, and those banks are advising them not to cash the IOUs. So what's an IOU-holder to do?

Credit unions announced they would accept the funny money, but many of them said only for their members. Another possibility? Craigslist or eBay, where dozens of would-be entrepreneurs are offering to cash state IOUs at 75 to 85 cents to the dollar. Such offers may have to be registered with the Securities and Exchange Commission as investments. Still, hard-up IOU-holders can be tempted.

WALT PYLE: I know of more than one lawyer that says, "I don't have any choice. I'm going to do it."

SPENCER MICHELS: Should Governor Schwarzenegger and the state legislature agree on a budget, there is still no guarantee the state will stop issuing the IOUs. It depends whether the state has enough money by cutting programs or raising taxes.

In any case, hard times for those who depend on state social programs seem a sure bet.

JIM LEHRER: On our Web site,, there's more about California's troubles, including links to local coverage by our PBS colleagues.