California IOUs, here we come

The California legislature can’t be accused of trying half-measures in their budget crisis.  Faced with a $24 billion shortfall and the need to issue IOUs instead of cash for its payments, Democrats tried passing an agreement that would have resolved less than 15% of their red ink.  Republicans blocked the effort, arguing that the state needs comprehensive action to permanently fix the budget — and now they’ve run out of time:

With a day to go until a cash crisis would force the state to stop paying its bills, lawmakers and Gov. Arnold Schwarzenegger worked into the night Tuesday but failed to reach a budget agreement.

The state Senate, in late session, voted several times as midnight approached in a last-ditch effort to approve $3.3 billion in cuts to education and other programs and stave off, at least temporarily, the IOUs that California Controller John Chiang is set to begin issuing Thursday in lieu of some payments.

Democrats had been hoping to use the funds to help defray the state’s projected $24-billion deficit. But the money was allocated for the fiscal year that ended Tuesday, and after that it was too late to make the cuts.

“We have that duty to make sure that no one starves,” state Sen. Jenny Oropeza (D-Long Beach) said as she pleaded with GOP senators for their votes.

But Republican senators blocked the plan, which the Assembly approved last week. Schwarzenegger had vowed to veto the legislation because it did not meet his demand that any agreement close the state’s entire deficit, an argument echoed by the Republicans in the Senate.

The approach favored by Democrats is akin to putting out a fire in your shrubbery while the entire house is ablaze.  California doesn’t have a $3 billion problem — it has a $24 billion problem.  Solving $3 billion of it doesn’t keep the state from defaulting.  It shirked the legislature’s responsibilities to produce a viable state budget.

It’s absurd, and the Republicans and Schwarzenegger were right in stopping it.  Democrats wanted to use this plan as a stall tactic in order to convince Californians to back higher taxes rather than make significant cuts in the state budget.  However, voters made their feelings plain on that subject in May, voting down a series of Democratic-sponsored, tax-raising referenda by a margin of 2-1.  After 40 years of ever-increasing taxes and spending sprees in Sacramento, Californians have finally had enough — even if Democrats refuse to listen.

What now?  The state has technically gone into default.  It has no budget (not an unusual occurrence in California), and it has no cash (which is the real problem).  Lenders will not buy bonds at cheap rates any longer, and after last night might not buy them at all.  California will have to start issuing IOUs with interest, which will cost them more money than if they’d just solved their problem months ago when they had the chance.