The Dreaded California IOU System Becomes A Reality

It was never a realistic hope that California would pass a budget that would close a gap of $24 billion between spending and income. Too many critical state services need funding and the destruction of jobs and real estate values have driven down California’s tax base to an unanticipated low level.

The state said it would have to resort to paying vendors with IOUs if the new budget was not in place today, and that has inevitably happened.

According to Reuters, “To conserve cash, State Controller John Chiang plans to issue IOUs by Thursday to the state’s vendors, local agencies overseeing health programs and various recipients of state aid.”

The action will certainly bankrupt many state businesses, cut essential state services, and deeply wound consumer spending. Not all of the suppliers to the state have the balance sheets and cash flow to withstand a period when they are being given paper that may be worthless. Their banks are not likely to take the IOUs as collateral, leaving them without capital to pay their own employees. This will surely cause the closing of many firms which will in turn lengthen the unemployment lines and put a bigger strain on social services that California has already said it cannot afford.

State suppliers that do not need its business to prosper are likely to turn down the option of taking IOUs instead of cash. Some of these firms undoubtedly provide essential services which means that a portion of the state’s critical government activities will simply disappear.

Not all of the IOUs go to vendors. A portion go to college students and the elderly. These people are part of California’s consumer base and will no longer be in a position to afford anything other than the most essential goods and services.

IOUs may look good on paper as a solution to California’s budget crisis but they will go a long way to contribute to the state’s ongoing decline.

Douglas A. McIntyre