Schwarzenegger puts case for IOUs - California governor talks to big banks

Schwarzenegger puts case for IOUs - California governor talks to big banks
By Matthew Garrahan in Los Angeles
Copyright The Financial Times Limited 2009
Published: July 2 2009 19:41 | Last updated: July 2 2009 21:35
http://www.ft.com/cms/s/0/3bfe0a24-6737-11de-925f-00144feabdc0.html


Arnold Schwarzenegger has made a personal overture to the heads of America’s largest banks to persuade them to accept the IOUs being issued by California in lieu of cash.

With a budget deficit of more than $24bn, California has started its new financial year deep in the red and has been forced to issue the IOUs because it has run out of money.

Mr Schwarzenegger has spoken with the heads of several banks. So far, Bank of America and Wells Fargo have confirmed they will accept the IOUs.

A spokesman for Mr Schwarzenegger said the governor had assured the banks that the IOUs were “rock solid”.

“California has never defaulted [on its debts] before and we’re not going to start now,” he told the Financial Times.

The state has been buffeted by the recession and the property collapse, while an over-reliance on income taxes and capital gains taxes paid by high-earners has put additional pressure on the state’s coffers.

It will issue IOUs until the state comes up with a budget that addresses its deficit. However, there were no signs on Thursday that an agreement would be struck between Mr Schwarzenegger and the members of the California assembly.

John Chiang, the state controller, said the IOUs were inevitable because of the stalemate. “I have no option but to issue IOUs...to businesses, students receiving financial aid, taxpayers expecting refunds, and local governments in order to meet our obligations to schools and our bondholders,” he said.

The state has asked its public employees to take three unpaid days of holiday each month to preserve funds. Meanwhile, Mr Schwarzenegger has spent the past few days locked in talks with the members of the state legislature.

Sharp divisions have emerged, with Republican members and Mr Schwarzenegger clashing with Democrats over potential spending cuts and tax raising proposals.

The fiscal crisis has revealed other divisions in the state. Voters in the big cities and coastal areas of California are mainly liberal and are generally in favour of paying higher taxes to reduce the budget deficit.

But the inland areas and Orange County in southern California are predominantly conservative and likely to side with Republican proposals that would cut public services.