Well folks, if you’re doing business with the State of California or if you’ve got a California State income tax refund due, you won’t be seeing anything that resembles what the US Constitution refers to as “legal tender”. The state is now issuing “IOUs” in lieu of payment.
In fairness to Arnie and the Marxists in the CA legislature it’s been done once before, in 1992. Governor Pete Wilson got into a pissing match with the Democrats in the legislature then and the state issued IOUs for 61 days until it was resolved.
That was a different time. I haven’t been able to find a reference to 1992 numbers, so this paragraph is conjecture but I’d be more than willing to bet my lunch that I’m, at worst, directionally correct. Today the CA legislature is facing a shortfall of about one-third of it’s budget and methinks those are very optimistic numbers based on the track record of governmental units across the nation projecting bad news. It always seems to be worse. The problem was no where near that in ’92.
Last time out the banks floated the State by treating the IOUs as cash. I would note that the overall condition of the banking industry in ’92 was a tad different than it is today. So, here are the basic facts of life for Californians today.
1. Some get cash some don’t. Courtesy of examiner.com, lets take a look at who gets what and draw your own conclusion about what’s going down in California:
|Paid in Cash||Paid with IOU|
|Legislators, legislative employees, and appointees||Grants to aged, blind or disabled persons|
|Department of Corrections||People in mental health treatment|
|University of California||People needing temporary assistance for basic family needs|
|Public Employees’ Retirement System||Persons with developmental disabilities|
|Judges||People in drug prevention, treatment, and recovery services|
|Health Care Services payments to Institutional Providers||Small Business Vendors and residents expecting a tax refund|
Draw your own conclusion.
2. The structure of the IOUs. I haven’t seen one, so I’m relying on The Sacramento Bee for this tidbit (I know, I know..).
The IOUs began going out a few hours after state financial officials set a 3.75 percent interest rate on them, along with a redemption date of Oct. 2.
So, the State is paying chump change on what is essentially a very high risk warrant. Please note that the State of California has the worst credit rating of any state in the country. They are roughly on par with Zimbabwe. Individuals whose credit ratings are comparable to the State go to a “Payday Loan” place and pay an APR of around 650%.
3. Banks will accept the IOUs. Sort of. Keep in mind that the “redemption date” on these little financial bombs is October 2, 2009. From the Twin Cities Bizjournal…
Wells Fargo said Thursday it will accept California IOUs from its retail and business customers until no later than July 10.
“We’re very disappointed, as are many Californians, that California has taken the unfortunate step of issuing IOUs in lieu of its payments to some businesses and individuals,” said Lisa Stevens, head of Community Banking for San Francisco-based Wells Fargo (NYSE: WFC) in California, in a statement announcing the move. “We are reluctant to take this step, but are doing so to help our customers who are not at fault.”
My highlight and JULY FREAKING 10???????? Now, it’s true that so far only Wells Fargo has put a close date on when they’d take these things, but bankers operate by herd instinct. If Wells is “concerned” and “disappointed”, just think how some poor schmuck in a cheap suit sitting in the board room of a “community bank” or an S&L is going to feel. I’ll give you a hint. They’re gonna puke on the mahogany conference table.
4. So, what happens if the banks stop treating this toxic waste as “money”? [ring][ring][Hello Barack?]
5. And on October 2?????? Where the hell is the State going to get the cash to buy back these little brown documents? Oh, and since Arnie & Friends have been playing with this for well over a year, what happens on Oct 2 when (not “if”) no budget is in place? See 4.
6. Oh yeah, real estate. If you’re dumb enough to believe the press releases put out by the NAR and their friends indicating that real estate has bottomed out, I’d refer you to every press release they’ve put out for the last three years. It’s going to get worse in CA. A lot worse.
7. Outgoing tax revenues for cities and towns in CA. Let’s forget the State for a second. Cities and towns get their cash from property taxes. Almost exclusively (IIRC sales tax revenue requires approval of the State). The tax is constitutionally limited to 1% of the most recent sales price. See 6. The Cities and Towns can’t issue IOUs. Heh.
8. Cities and towns, and the State to a lesser extent, are sitting on a huge unfunded retirement cost. They’ve give their union employees phenomenal retirement packages which allow for retirement at around 20 years of service. Those retirement plans are, by and large, grossly under-funded or unfunded.
If you think for a minute the little blip in the road that gave us TARP was rough, just wait. You ain’t seen nothing yet.
To the current residents of California: Please go north. Oregon and Washington both are beautiful states. They are green. They are close to the ocean. They have progressive governments. The people are friendly. Housing prices are very reasonable.
Stay the hell out of Arizona. It’s really, really hot here. And don’t let that “dry heat” crap fool you. When it’s 115 and you go outside without water for 10 minutes you die. Arizona is brown, we don’t allow the color green in the state, it’s the law. If you’ve seen pictures with green stuff in them, they’re Photoshopped. Our state government is regressive, it’s run by Republicans who are cutting money from kindergarten programs so they don’t have to raise taxes on the rich. . Housing here is cheaper than it was, but it’s still going down so if you buy a house here you’re looking at losing your shirt. Most of us here in AZ carry guns. And we will probably shoot you if you’re snotty to us.
Now I’ll freely admit I don’t have a solution that would fly in for the problems facing CA. I have a solution, but it wouldn’t even get close to airborne. Frankly, I think the end of the world is at hand.