California nears budget-gap deadline

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Tess Vigeland: Here in California we endure endless jokes and sight gags about our state cracking off and falling into the Pacific. Well, money-wise, it could happen if our politicians can't find a solution to a budget impasse before the clock strikes midnight.

The state is facing a $24 billion shortfall. Governor Arnold Schwarzenegger says he will not agree to the most recent package of tax increases and spending cuts proposed by Democratic lawmakers. Without some sort of legislation, California's piggy bank will empty.

Joining us now from the state capital in Sacramento is reporter Evan Halper of the Los Angeles Times. Thanks for taking the time to chat with us.

EVAN HALPER: Thanks for having me, Tess.

VIGELAND: Just remind us very briefly. How on earth did we get to this point?

HALPER: Well, tax revenues have dropped off precipitously. And California is a state that is overly reliant on income taxes. As soon as things drop off, as they have over the last several months, the state certainly winds up in a budget crisis, as it continually has over the last many years.

VIGELAND: Well, the talk now is that if there is not a solution that by Thursday we could be looking at IOUs going out to everyone that the state normally pays. What will those actually look like? Is that going to be a piece of paper that people get in the mail?

HALPER: Yeah, if you're used to getting a check from the state, instead you'll get this kinda registered warrant, this IOU. There will be a panel that will decide what interest rate the state will pay on these IOUs, and the banks will probably make their decision on whether it's worth their while to honor the IOUs based on what interest they can get out of it.

VIGELAND: So it sounds like there is still a little confusion over these IOUs, but is there anything that says, for example, who would get paid back first if those are issued?

HALPER: There are some payments that we have to make. They can't be IOUs, as long as there is money in the state Treasury. Like payments to schools are legally guaranteed, payments to repay debt. As far as paying back the IOUs that the state does send out, I believe the controller has some discretion on who gets paid back first once there is money.

VIGELAND: So there is still money, then?

HALPER: There is money to do some things, there's just not enough money to do everything that state government normally does. And some of those are pretty big things, there's not going to be money, for example, to pay these welfare cash grants to the elderly, blind, and disabled. There's not going to be enough money to make payments to students receiving some financial aid. There's not enough money to make payments to many local governments.

VIGELAND: So what does that look like? Do we have any notion of what a bankrupt state looks like? Who might feel that the most?

HALPER: You know, the experts will tell you the state can't go bankrupt legally, but in sort of practice, that's kinda where we are heading. And we've been there in 1992 and before that back in the Great Depression, and what it looks like is a mess. If you're a vendor, trying to do business with the state, and you're just getting these IOUs, you're not getting paid, and then people wind up having to lay off staff. We talked to people when this almost happened last time around who, for example, have contracts with the state to bring low-income dialysis patients to their appointments. And they were having to shut down their businesses because they weren't going check to check, and they couldn't pay their employees.

VIGELAND: Do you think average Californians really have any notion of how bad this is and could get. I mean, you look at, for example, the local television news, and I think it was maybe the fourth or fifth story last night.

HALPER: I think Californians have been told the sky is falling so many times since right before the recall that they've grown numb to it, and it just looks to them like sort of more yelling in Sacramento and the sky has not fallen yet, so they tune it out.

VIGELAND: All right, I guess we'll see what happens after midnight tonight. Evan Halper is the Sacramento bureau chief for the L.A. Times. Thanks so much, and good luck tonight.

HALPER: OK, thank you, Tess.

About the author

Tess Vigeland is the host of Marketplace Money, where she takes a deep dive into why we do what we do with our money.

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