Monday, June 29, 2009

California - The Clock Keeps Ticking

California looming debt crises continues to draw closer. I was having dinner with someone this weekend and told them I had no doubt that the first deadline would not be the implosion. They would find someway to patch it up to buy time. Sure enough, it seems they have bought another 30 to 90 days.

From McClatchy

California state controller John Chiang warned Wednesday that if legislators and Gov. Arnold Schwarzenegger fail to come up with a budget-balancing package in the next week, he would begin paying California's bills with IOUs on July 2.

"The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall."

I am not exactly sure how these IOUs will work but it sounds like they are just expanding accounts payable. This is a common game with companies right before they declare bankruptcy. They can buy several months by letting the days outstanding of accounts payable increase as they pray for a miracle.

As the LA Times points out, this isn't the first time California did this. Last time, they got their miracle.

But even that seems familiar. California has issued IOUs before, back in the early 1990s. Then it got its budget, the economy improved, and everyone wanted to lend the state money.

The editorialist points out why this time it is different.

We survived that, so what's the big deal?

The familiarity is an illusion. The state has had enough cash to pay its bills since July 2007 only because it borrowed from various supposedly off-limits special funds. Now that money too is almost gone. IOUs, coupled with anticipated monthly tax revenues, might preserve the state through September, but only with permanently decimated access to the credit market. After that, default.

My guess is there will be some agreement with the various branches of California government. That also will only be a short term patch. It could give confidence to those poor hapless individuals who are taking those IOUs as forms of payment. America is a land of creativity and in the last year we have to be the most creative species on earth in ways to delay certain things that are inevitable.

Thanks goes to Jarred for the links.

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