When a state or city runs out of money, how does it pay its key suppliers and vendors? The issue is becoming top of mind now that many places face falling tax bases and lack of access to credit markets to sell municipal bonds.
In California, the answer may be IOUs. The state may not be able to pay the company that cleans the capitol building or the car company which supplies vehicles to the state police.
Welcome to the new economy and another horror for the business world. According to Bloomberg, "California, the world's eighth largest economy, may pay vendors with IOUs for only the second time since the Great Depression, State Finance Director Mike Genest said. " The state has an $11 billion deficit.
Most vendors can't sue the state for the money. Even if they could legally take their cases to court, how many have the cash to face a protracted legal battle?
What it means is that California is cutting its own throat, whether it wants to or not. Some companies doing work for the state need the money. A piece of paper won't let them make payroll. Those firms will fold. When they do, unemployment in the state will continue to move up. That creates a need for more social services for the people without jobs. It means fewer people and companies to pay taxes.
It is a cycle which could take California to the brink of receivership or a federal bailout all its own. When the largest state in American needs that kind of help, the recession really has gotten out of hand.
Douglas A. McIntyre is an editor at 247wallst.com.
Reader Comments (Page 1 of 1)
12-05-2008 @ 5:41AM
al coholic said...
When the "Governator" first came to office he benefited from economic forces that made him look like a financial genius. Well, the Market givith and the Market taketh away.
Maybe Arnold could make a "geezer" Terminator movie and pay off the state's debts with the proceeds....LOL
12-05-2008 @ 7:59AM
Ann said...
Yes, but you will be able to sell the IOU's at a discounted rate at the banks or at least at those check cashing places. You will be able to pay some bills. It will be like giving a discount. You just have to be sure to cover your costs even if there is little or no profit.
12-05-2008 @ 8:04AM
BHarrison said...
Well, if states start paying in IOUs, then it isn't a Recession, it is a full fledged DEPRESSION!
12-05-2008 @ 8:38AM
Irish said...
Can we "little folk" pay our mortgage, utilities, gas, food, health/property/car/life/flood insurance premiums, and cable & phone bills with IOU's, too? Where's the assistance we need? All the "assistance" out there is for the governments (all levels) and Wall Street. When is it our turn?
1-11-2009 @ 9:58PM
Californian said...
Why can't he just accept defeat and get some bailout money from feds, enough to run Unemployment Ins. If I don't get my UI check, i am dead! I will have no money. Been trying to look for a job for 3 months and I didn't get my check this last week. No check means no form to submit for the next check too. Arnold Needs to accept that the lawmakers are not going to come up with a plan fast enough, its been too long already. We need a bailout now!