Business | Banking
Schwarzenegger promotes case for IOUs as California drowns in debt
Governor makes personal overture to heads of banks to stave off looming crisis.
- By Matthew Garrahan, Financial Times
- Published: 23:26 July 3, 2009
Los Angeles: Arnold Schwarzenegger has made a personal overture to the heads of America's largest banks to persuade them to accept the thousands of IOUs being issued by California in lieu of cash.
With a budget deficit of more than $24 billion (Dh88.14 billion), California has started its new financial year deep in the red and has been forced to issue the IOUs because it has run out of money. However, it is unclear if banks will accept the IOUs, forcing Schwarzenegger to act.
A spokesman for Schwarzenegger confirmed the talks and said the governor had assured the banks that the IOUs were "rock solid".
"California has never defaulted [on its debts] before and we're not going to start now," he told the Financial Times.
The state has been buffeted by the recession and the property collapse while an overreliance on income taxes and capital gains taxes paid by high-earners has put additional pressure on the state's coffers.
It will issue IOUs instead of cash until the state comes up with a budget that addresses its ballooning deficit. However, there were no signs on Thursday that an agreement would be struck between Schwarzenegger and the members of the California Assembly.
John Chiang, the state controller, said the IOUs were inevitable because of the stalemate. "Without action by the legislature and governor to provide enough cash to pay all of our bills this month, I have no option but to issue IOUs& to businesses, students receiving financial aid, taxpayers expecting refunds, and local governments in order to meet our obligations to schools and our bondholders," he said.
The state has asked its public employees to take three unpaid days' holiday each month in order to preserve funds. Meanwhile, Schwarzenegger has spent the past few days locked in talks with the members of the state legislature. Sharp divisions have emerged, with Republican members and Schwarzenegger clashing with Democrats over potential spending cuts and tax-raising proposals.
The fiscal crisis has revealed other divisions in the state. Voters in the big cities and coastal areas of California are mainly liberal and are generally in favour of paying higher taxes to reduce the budget deficit. But the inland areas and Orange County in Southern California are predominantly conservative and likely to side with Republican proposals that would cut public services to reduce the deficit.
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