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How Long Can the State Function without a Budget?

How Long Can the State Function without a Budget?
As California struggles with closing a $26 billion budget shortfall, the state began issuing IOUs on July 2, for only the second time since the Great Depression. We'll get the latest news from Sacramento on the budget crisis.

This is a rush transcript created by a contractor for KPBS to improve accessibility for the deaf and hard-of-hearing. Please refer to the media file as the formal record of this interview. Opinions expressed by guests during interviews reflect the guest’s individual views and do not necessarily represent those of KPBS staff, members or its sponsors.

Analysis: California Issues IOUs

MAUREEN CAVANAUGH (Host): I'm Maureen Cavanaugh. You're listening to These Days on KPBS. Now that we have the 4th of July holiday out of our systems, it's time to take a closer look at the bad turn the state budget mess has taken in recent days. Last week, Governor Arnold Schwarzenegger declared a fiscal emergency and ordered lawmakers to come up with a $26 billion budget plan within 45 days. The State also started issuing registered warrants, commonly known as IOUs, instead of cash payments for some government obligations. To tell us more about the situation we're in and what lawmakers are doing about it, I'd like to welcome my guest John Myers. He's Sacramento bureau chief for the California Report. Good morning, John.


JOHN MYERS (Sacramento Bureau Chief, The California Report): Good morning.

CAVANAUGH: Well, what, if anything, John, happened over this long holiday weekend regarding the budget crisis?

MYERS: Well, I'm trying to think if I could characterize it as 'something happened.' They met. Whether they moved any remains to be seen. I actually don't think they did. There was a long meeting last night here at the state capitol and Governor Schwarzenegger and the four legislative leaders are scheduled to meet again. Even right now, as we're speaking, they were scheduled to meet at nine this morning. But the reality is, they are still a pretty long ways apart. You know, once things passed the July first deadline, the – I think the negotiating got a lot harder. And it's important to remember, for folks to remember, they – everyone in California always hears about a July first deadline and budgets. In most years, it's a constitutional deadline to get a budget enacted. Well, we actually have a budget enacted that was put in place back in February in that budget deal. What they're trying to do now is a budget deficit solution because, of course, we're trying to solve about $26.3 billion of problems and that's really difficult to do. And I think the real reason it's so hard is just look at how many deficit solutions have been done over the last year. There was a multi-billion dollar deficit solution in September, there was another one, a $40 billion solution in February, and now we're talking about $25, $26 billion in July. It's very, very tough to do all of that in one year.

CAVANAUGH: And, John, last Thursday, as I said, the state began issuing IOUs. Who are they issuing them to?

MYERS: Well, the reality is, is that there are – most of the payments that the state has to make every month are guaranteed by either the state constitution or by rulings from courts about, you know, that you have to pay certain people. The constitution says you have to pay schools, you have to pay bond debt, things like that. But there is a segment of state invoices every month that can be stopped so in July it's about $3.4 billion that would go out with IOUs by the end of the month. That's assuming we keep issuing them through the whole month. These are vendors, these are private companies who do business with the State of California, these are local governments who administer social services programs like CalWORKs, the welfare assistance program, and these are taxpayers who are expecting tax refunds from the State of California. So the State Controller, John Chung, began issuing them, as you said, last week. Somewhere, about twenty-eight thousand dol – 28,000 IOUs on the first day alone, which was Thursday. And, you know, these are difficult. This is only really the second time in California history since the Great Depression that we've issued IOUs and they carry a huge cost because we have to pay them back with interest. And one of the things that will be really fascinating is by the end of this week, two major financial institutions, Wells Fargo and Bank of America, have said they may not continue to honor those IOUs so they're taking them for now but if they don't take them after the end of this week, you're going to have folks left on the hook there with these pieces of paper if they need money.


CAVANAUGH: Now aren't IOUs usually the last resort when we're in a budget stalemate? This time it's like the first thing they did.

MYERS: Well, they are the last resort. And if it seems like it's the first thing they did, it may be just a reflection of how difficult it has been to find a solution. It really was kind of the last thing that came across when these negotiations broke down last week. The real challenge is, you know, there's a two-pronged challenge if people can try to get their heads around it. The first one is a budget problem. Again, there's a $25, $26 billion budget problem between now and next July. But more immediate is a cash problem; the state is running very, very low on cash to the tune of, you know, somewhere around $20 billion by the end of the year. Now the state normally goes out to Wall Street and borrows money in a short-term borrowing because we have ebbs and flows of when tax revenues come into the state and when the bills come in. But the combination of the economy, the budget problem, and that cash problem has forced the controller's hand on those IOUs. And I think one of the questions that a lot of us here at the state capitol want to know is how soon does the reality of those IOUs, how soon does that influence lawmakers to accept some things they don't want to accept, some deeper cuts or possibly some new revenues, and find a middle ground. Right now, there isn't a lot of middle ground between what the Democrats want and what the governor and his fellow Republicans want.

CAVANAUGH: Is issuing the IOUs part of whatever strategy the governor has right now?

MYERS: I don't know if I would call it part of the strategy. I think there's an acceptance now of them finally that there was no way around it. When things broke down last week, it was really a turning point in the IOU debate because there were a certain number of savings and this is going to complicate just about ev – be complicated for just about everybody who listens to this.


MYERS: There were a certain number of savings that had to be enacted by midnight June thirtieth, July first. There were about $3 billion in savings to avoid IOUs for the month of July. Well, the governor and legislative Republicans said we're not going to endorse those savings until we get an entire deficit solution. The Democrats said, why don't we do at least those and then we'll keep negotiating on the rest? Well, you know what happened. Those savings evaporated at midnight on July first. And as a result, that threw the state immediately into the IOU game because there wasn't enough money by the end of July. And so, really, when that happened, when that breakdown happened on July first, we have been stuck here for the last, you know, several days since then, you know, arguing about what comes next. And the real difficult part now is the governor is proposing a suspension of the constitutional guarantee for school funding, Proposition 98. He says that's the only way to recoup the savings that were lost last week. And Democrats are saying that's the worst thing they think could happen. And so here you go. We're sitting at an impasse.

CAVANAUGH: Now, John Myers, Sacramento bureau chief, you are right in the – for the California Report, you are right in the heart of things in Sacramento so you know all the nuance and all the details. I think for a lot of people, you know, we know that the special election initiatives were defeated. What kind of proposals are the legislators actually dealing with right now to try to come up with a solution to this thing?

MYERS: Well, if – let's step back and take the first part of that and talk about the special election just for a moment. I mean, I think one of the raging debates that has – doesn't seem to have ended at all is what was the message voters were trying to send from that special election? They defeated all six of those budget related proposals. And there – You know, there's one school of thought that says, well, clearly, voters were rejecting tax increases and that's fair. There are others that say, and while the voters were rejecting all of it, including borrowing from some social programs, borrowing from the lottery, you know, things like that. And so it's – you know, everyone has tried to figure out what did the voters tell them to do? And because I think that is so complicated, they came back and they decided, well, let's see what else we can do. And so really what we're talking about now is we're talking about somewhere on the order of twelve to fourteen to fifteen billion dollars of spending cuts. Again, think of a $26 billion problem so somewhere in the order of about $14, $15 billion in spending cuts. Several billion dollars more in what I would call accounting gimmicks, kind of shuffling things around, making the books look as though they balance, pushing revenue from one fiscal year to the other, and then, you know, and then a limited number of other kinds of transfers of internal borrowing. And, again, trying to close that, you know, $24, $25, $26 billion gap but the real sticking point, at this point, are two things: How many more cuts can you make? The Democrats believe there are only so many more you can make before you really cut into what they call the social safety net. And on the governor's side, how many more reforms does he want of the budget process? For instance, you know, some kind of reforms in the welfare-to-work program, CalWORKs or in in-home healthcare. How many reforms can you get that way to save money? And then, frankly, can you close the rest of the gap through these accounting maneuvers or do you have to raise taxes? And, clearly, there's an opposition to that on the Republican side. And so you've got almost what I call a game of three-dimensional chess going on here. You've got not only multiple problems but you've got multiple players here because you have to have a two-thirds vote in the legislature and the approval of the governor.

CAVANAUGH: Yeah, we're one of the only states that requires that two-thirds vote. How likely is that that requirement is going to be changed to avoid budget messes like this? People are talking about that constitutional convention that doesn't do us any good right now, though, does it?

MYERS: No, it doesn't. And it's further complicated by that there are two separate two-thirds votes issues. There's a two-thirds vote to pass a budget, and there's a two-thirds vote to increase taxes. And the latter there, the tax increase two-thirds, is part of Proposition 13, which, we all know, has been in place for the last 30 years. So we are the only state in the country that requires a two-thirds for both of those operations. So there's a lot of discussion about changing the two-thirds vote in the legislature for a budget. That would be fine but that wouldn't solve your problem this year because you couldn't raise taxes without a two-thirds vote. So I think the odds of changing the entire system are still very small. There are a lot of Californians who believe it should be very hard to raise taxes here at the state capitol. And the constitutional convention idea is moving forward but you're absolutely right, it's not going to solve our problem now. We've got to – The clock is ticking on the problem we've got now before the state really does run out of cash.

CAVANAUGH: Now if the Sacramento – if the lawmakers up there can't resolve the stalemate, what would it take for the federal government to step in?

MYERS: Well, it's a tough question.

CAVANAUGH: I mean, there…

MYERS: Yeah, go ahead.

CAVANAUGH: There must be some discussion about that in Sacramento.

MYERS: I certainly know that there is discussion. I don't know that it has reached the level of like serious, high-level discussion of, you know, phone calls between Sacramento and Washington, D.C. I think part of the problem – There are two problems. One of them is defining exactly what assistance we would want from Washington. Several weeks ago the State Treasurer, Bill Lockyer, and others were asking the Obama administration for basically a guarantee on our borrowing from Wall Street. We weren't looking for money, we were just looking for a – almost like a co-signer, if you would, of our borrowing from investors on Wall Street. The Obama administration said no, you're going to have to figure it out on your own. The more politically charged idea is actually asking for money from the federal government and there are some people, not necessarily politicians, but there's some economists I've talked to who say, you know, that's not an unreasonable thing for Washington to think about. When you think about California represents somewhere on 12 to 15% of the entire country's economy, problems that happen here are going to be felt all across America. And one economist in particular said to me, if the federal government can spend money on Chrysler and GM, why not California? But it's a politically loaded and volatile, I should say, issue to be talking about money to help California's problems.

CAVANAUGH: And in the meantime, I read that Governor Schwarzenegger is advocating for these budget talks in the legislature to be broadcast on television in an idea that it'll get the public all riled up and they'll rise up and demand that something happen. Do you see that happening, John?

MYERS: No, I don't. And, you know, and it's interesting that the governor would say that because, I mean, the governor has been a key proponent of the, what they're called, the Big 5 meetings in the past and, you know, he says he doesn't like them but he's participated in them. And, again, for people to understand what we're talking about is, we're talking about the meetings between the governor and the top legislative leaders which are conducted inside the governor's office and so this notion that you would let the public in, which reporters like me would love to see happen, I think is not likely because the reality is, is that these folks don't seem to think they can negotiate these deals in private – I mean, in public, I should say. And part of that is the politically charged atmosphere here in Sacramento. You've got powerful, powerful interest groups who do not want particular options on the table. You've got lawmakers who are very concerned about reelection and they don't really want to be seen discussing in public some of the more unpalatable ideas about how to resolve the state's problems. So, you know, it's a great headline for the governor to say that. I think actually even watching the governor do it in public would be fascinating but it's a longshot.

CAVANAUGH: The budget, the reality show, right?

MYERS: Yeah, exactly. And who do we get to vote off at that point? It's like "Survivor," I guess.

CAVANAUGH: Well, thank you so much, John Myers. I really appreciate it. I've been…

MYERS: You're welcome.

CAVANAUGH: …speaking with John Myers, Sacramento bureau chief for the California Report. Stay with us. These Days continues in just a few minutes.