Reporting from Sacramento -- The state will suspend tax
refunds, welfare checks, student grants and other payments owed to Californians
starting Feb. 1, Controller John Chiang announced Friday.
Chiang said he
had no choice but to stop making some $3.7 billion in payments in the absence of
action by the governor and lawmakers to close the state's nearly $42-billion
budget deficit. More than half of those payments are tax refunds.
The controller said the suspended payments could be rolled
into IOUs if California still lacks sufficient cash to pay its bills come March
"It pains me to pull this trigger," Chiang said at a news
conference in his office. "But it is an action that is critically
The payments to be frozen include nearly
$2 billion in tax refunds; $300 million in cash grants for needy families and
the elderly, blind and disabled; and $13 million in grants for college
Even if a budget agreement is reached by the end of this
month, tax refunds and other payments could remain temporarily frozen. Chiang
said a budget deal may not generate cash quickly enough to resume them
Not all payments will stop Feb. 1. Most school and
healthcare programs will be paid, as required by state and federal law. The
state will continue to pay more than $6.6 billion in such bills.
Angeles County officials said they would cover welfare payments to more than
500,000 local recipients -- for now.
But California is projected to be
$346 million short of the funds it needs to pay all its bills in February. By
March, the state would be so far in the red that even continuing to suspend
payments would not cover the shortfall. California would be insolvent, making
the issuance of IOUs likely.
State officials have already designed an IOU
template, Chiang said, and have been negotiating with banks over whether
taxpayers could cash or deposit them if they are issued. The state could be
forced to pay as much as 5% interest on delayed tax refunds if they are not paid
by the end of May, Chiang said.
The last time the state issued such IOUs
-- the only time since the Great Depression -- was in 1992.
suspension of payments is the latest radical move by officials to help keep the
state from running out of cash as Gov. Arnold Schwarzenegger and the Legislature
battle over how to avoid insolvency.
Schwarzenegger, who hopes to speed
up public-works projects to stimulate the economy, wants tax increases, spending
cuts and legislation to relax some environmental rules and allow private
companies to do some government construction.
Democrats are seeking tax
increases as well, but fewer spending cuts. Republican lawmakers would only pare
spending and have been blocking any tax hikes.
has ordered that most state workers take two days off per month without pay --
equivalent to about a 10% pay cut. The governor also ordered most state offices
-- including all DMV field offices -- to close on those two days. The order is
being challenged in court by labor unions.
The state has also halted
payments of bond money for more than 5,300 public-works projects.
Friday, the state Department of Finance temporarily exempted 276 of the projects
from the freeze, reasoning that because they are nearly complete, it could cost
the state more to shut them down than to finish them.
through Feb. 1, will allow the continuation of school construction by the
Inglewood Unified School District and the construction of a new Court of Appeal
facility in Santa Ana. Work on new rail tracks at L.A.'s Union Station and road
projects involving Irwindale Avenue, Martin Luther King Boulevard and Imperial
Highway in Los Angeles County will also be able to continue.
projects were exempted because the state is under court order to do the jobs.
Others would threaten public safety if left uncompleted, according to Mike
Genest, Schwarzenegger's finance director.
"We're going to take the risk
of allowing them to continue a little longer because we are very hopeful will
have a budget by Feb. 1," Genest said.