Work Gets Under Way to Clear IOUs, Backlog of Unpaid Bills

Now that there’s finally a state budget, officials have started the arduous task of clearing away the government’s backlog of bills and revving up its financial engines again after operating for more than two months without spending authority.

And very soon, the once-Golden State, which was reduced to paying its bills with IOUs or not paying them at all, will again be flush with cash.

With the budget settled, state Treasurer Kathleen Brown is expected to go to the financial markets today for a $3.3-billion short-term loan that will allow California to redeem IOUs and pay government workers, doctors, hospitals and suppliers with regular checks beginning as early as Friday.

“I’m relieved that I’m able to do my job--to finance the state’s needs at the lowest interest rates possible instead of living with the disgrace of IOUs that cost taxpayers 5% (interest),” Brown said.

At the same time, state Controller Gray Davis is promising to make good on $1.1 billion in accumulated bills over the next 24 hours, now that he has the legislative authority to pay them.

“Those who have suffered the most are going to get paid first,” Davis said Wednesday.

The first payments, totaling $137 million, will go to nonprofit regional centers around the state that provide vital services to the developmentally disabled, Davis said.

The centers have received no payments since July 1, the beginning of the state’s fiscal year, and several have been temporarily forced to shut their doors or lay off most of their staffs because they were unable to borrow money to tide them over.

Davis said that until cash from the state’s “bridge” loan becomes available later this week, he will continue to make payments with IOUs. Officially called “registered warrants,” these interest-bearing IOUs have become emblematic of the state fiscal crisis, and early last month the state’s largest banks began refusing to cash them.

But Davis said 23 financial institutions, including Bank of America and Wells Fargo, have assured him they will resume cashing their customers’ IOUs now that they know the state will begin redeeming them in a day or two. Those being paid in IOUs include most state workers, county welfare agencies and some merchants who do business with the state.

Davis said bills for goods and services have continued to pour in during the two-month budget debacle.

Some payments, guaranteed by court action or by constitutional requirements, have been made on schedule. But other bills have had to wait for Gov. Pete Wilson and the Legislature to settle their differences and enact a spending plan.

Davis estimated that it would be two weeks before he and his staff are able to process all the overdue bills and resume making payments on a regular schedule.

Brown, the state’s banker, and Davis, the state’s paymaster, had harsh words for Wilson. The two Democrats blamed the Republican governor for failing to employ available devices that could have avoided a drop in the state’s bond rating--and that might have reduced the impact of the crisis on those who were owed money by the state.

Brown has estimated that the fall in bond ratings will cost taxpayers $200 million in added interest over the next 20 years. Interest payments on the IOUs have cost the state about $10 million.

There were “alternative financing mechanisms,” Brown said, that could have been used to avoid issuing IOUs but Wilson refused to authorize them.

“It was part of a brinksmanship strategy that failed miserably and cost the taxpayers millions,” she said.

Davis was equally harsh in his judgment of Wilson. “The governor used a brass knuckles approach,” Davis said. He complained that Wilson’s office began issuing bulletins about the harm caused by the failure to agree on a budget while fighting efforts in court to assure payment of the state’s bills. “He fought very hard to be sure there was some misery,” Davis said.

Wilson and his staff have argued that they needed to hold the line to bring about a fundamental reduction in state spending and avoid continuing budget deficits in the future.

Early next month, Brown and her staff expect to return to the financial markets to borrow as much as $6 billion. The money will be used to retire the $3.3-billion “bridge” loan. The balance will help the state through several lean months ahead, when expenses can be expected to exceed available revenues.