Controller John Chiang laid out a nightmare scenario today of the state's resorting to IOUs or costly and uncertain emergency loans if Gov. Arnold Schwarzenegger and legislators don't agree on steps to close the state budget deficit very quickly because the state will run out of cash in about two months.
"Specifically, my office will be forced to pursue the deferral of potentially billions of dollars
in payments and/or the issuance of individual registered warrants, commonly referred to as IOUs," Chiang said in a letter to the governor and other officials.
"In order to ensure that the State can meet its constitutionally required obligation to schools and debt service, the Capitol's budget paralysis may leave me no choice but to, in full or in part, withhold payments or to issue IOUs to other individuals and entities entitled to state payments. Given the current financial instability of the banking industry, it is highly unlikely that the banks, if they accept the IOUs at all, will be able to do so for any sustained period of time. Consequently, the recipients of the registered warrants may have no apparent options but to hold them until redemption."
Chiang said his office is also pursuing the issuance of "revenue-anticipation warrants," a form of short-term borrowing that carries high interest and heavy fees because it's believed that the state cannot issue "revenue anticipation notes" that would have to be repaid by June.
Treasurer Bill Lockyer has said he doubted whether lenders would respond to the revenue warrants, known as "RAWs," but Chiang said his staff is pursuing that option to avoid the cash crunch expected in February.
"Without action by the Legislature and the governor, we literally are weeks away from a meltdown of state government that threatens the delivery of critical public services our citizens deserve and expect," Chiang said.
The full letter may be read available here.
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