California begins issuing IOUs … to the peons

Facing a budgetary crisis of its own making, California has begun to issue IOUs instead of cash payments to at least some of its creditors.  For the first time since 1992, the state government has too little cash to meet its obligations.  However, Governor Arnold Schwarzenegger insisted that the state was “responsible” enough for banks to accept the IOUs at face value:

California’s controller will start paying many of the state’s bills with promissory notes as soon as Thursday after lawmakers failed to close the state’s worsening budget deficit, adding a new measure of indignity to a state sinking deeper into dysfunction. …

State Controller John Chiang said his office is prepared to issue promissory notes totaling $3.3 billion in July.

It will be the first time since 1992 that California will have issued promissory notes. The move is almost certain to further damage the state’s credit rating, already the lowest of any of the 50 U.S. states, saddling taxpayers with billions of dollars in higher interest payments on bonds that have yet to be sold.

Issuing the promissory notes — formally referred to as individual registered warrants — also will have real-world consequences for those on the receiving end. Small businesses that rely on state contracts will be most affected. …

Bank of America announced Wednesday it would cash the state’s promissory notes for its customers through July 10, bank spokeswoman Colleen Haggerty said. Schwarzenegger and state officials asked other banks to do the same, noting that California has never defaulted.

“We will make those payments,” he said. “We are responsible.”

If they were responsible, they wouldn’t have to issue IOUs now.  The state government has been a model of irresponsibility for the past couple of years as this utterly predictable budget crisis approached.  They raised taxes and then discovered they’d misjudged revenues.  After that, they tried using referendums to get overtaxed Californians to raise taxes on themselves, and got spanked at the ballot box.  With six weeks to go after that, the legislature still refused to make the cuts necessary to avert the crisis.

How, exactly, is that “responsible”?

Felix Salmon at Reuters also discovers that not all creditors are created equal in California’s eyes.  Some people will still get cash rather than a wish sandwich in the mail.  See if you can discern a theme:

Figure it out yet?  The people who most need cash get IOUs, while the people who could stand to operate on credit get cash.  I guess this is also “responsible”.

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