California Delays $4 Billion In Payments

In a move that could be echoed by other states facing financial problems the state of California is delaying approximately $4 billion worth of payments, including $2 billion worth of tax refunds to individuals and businesses.

From the WSJ:

California’s chief accountant on Monday will begin delaying nearly $4 billion of scheduled state payments, postponing income-tax refunds, grants to college students and welfare checks in an effort to prevent the state from running out of cash.

The delays will hurt an already wilting state economy, economists said, calling them the opposite of stimulus checks because people won’t get money they expect to receive. Controller John Chiang has said the delays will last 30 days.

In an interview Friday, Mr. Chiang said further deferments are possible. “I am very concerned about the potentially devastating impact to individuals, to families, to businesses,” he said. But “my principal responsibility at this time is to make sure that California does not go into default”…

With many municipalities also ailing from the downturn, it isn’t clear how they will handle their new responsibilities. “It’s a substantial problem when billions in tax refunds don’t go out, because they are considered a kind of economic stimulus,” Mr. Dickerson said. “If payment delays continue into April and March, it will be a disaster.”

While many counties have enough cash to get through February, Trinity County in Northern California has only two to three weeks of reserves, said Dero Forslund, Trinity’s administrative officer. Once the money runs out, the county will issue IOUs to its 320 workers, he said, and then see if service reductions will be necessary as well. Trinity was expecting $2 million from the state in February, he said.

For years, California has relied on borrowing, by selling municipal bonds, to help get through difficult budgetary situations. But with a bond market that has nearly dried up — and with a poor credit rating — the state is hard-pressed to borrow. Moody’s Investors Service last week joined two other major credit-rating agencies — Fitch Ratings and Standard & Poor’s — in warning it may further downgrade California’s rating. California is already tied with Louisiana for the lowest credit rating among states.

Graphic courtesy of the WSJ

Reading this article and thinking about the municipalities and companies that can’t function without borrowing that often increases on an annual basis, it makes me think that we need to rethink what makes a municipality, company, etc, “solvent”. Because even after if you consider that solvency can change on a dime, anticipated issues can push an organization over the edge, etc, this is becoming an all too familiar story: an organization that can’t function once it’s no longer able to borrow money.

Again I understand that are plenty of legitimate reasons for borrowing money, but when it’s your lifeblood as far as financing operations as opposed to financing growth and investment you really need to rethink whether or not you’re actually solvent.

Going back to the original topic: don’t be surprised if several other states institute similar measures in the coming months. Furthermore if the current administration isn’t able to help struggling states with their cash shortfalls, these “payment delays” could very easily off-set any good we see from the stimulus package.

Of course I believe the current stimulus package is the functional equivalent of trying to fill the shallow end of the pool with water from the deep end, but perhaps that’s a topic for another post.

You can read more here.

Source:

The Wall St. Journal: “California to Delay $4 Billion in Payments” — Bobby White, Stu Woo

Disclosure: at the time of publishing the author didn’t own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn’t be viewed as financial or investment advice.

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