January 17, 2009
State may delay tax refunds, disability checks
By Matthew Yi
State Controller John Chiang warned Friday that he will delay nearly $3.7 billion in state payments in February - including income tax refunds and help for low-income and disabled residents - unless Gov. Arnold Schwarzenegger and lawmakers strike a budget deal for the cash-strapped state by end of this month.
The 30-day delay will likely keep the state from running out of money next month, avoiding the use of IOUs in February and likely in March, Chiang said. But his office, which manages the state's cash flow, would resort to IOUs if the state can't meet its financial obligations, he said.
"This is a very painful decision," the controller said at a news conference in his Sacramento office. "It pains me to pull this trigger but (it) is an action that is critically necessary. The fallout from issuing IOUs and the state going into default would be long-lasting and something to be avoided at all costs."
The prospect of the state delaying tax refunds and health and disability payments angered some Californians.
"If the Legislature screws up, it's we who have to pay," said Peter Wilson, 52, of Antioch. "(The tax refund) is like our savings where once a year we get our savings back. It's like (the governor and the Legislature) do the gambling and we cover the loss."
The largest portion of the payment delays in February would come from income tax refunds, at nearly $2 billion. By law, the state has until May 30 to issue the refunds so it will not face financial penalties. In most years, the state has issued tax refunds as soon as they are processed by the state Franchise Tax Board, Chiang said.
But there will be penalties for other delays. The controller is expecting the state to incur more than $16 million in interest by delaying for 30 days other payments, including grants to the poor, aged, disabled and college students.
Checks cover essentials
Sherlie Magers, who has bipolar disorder and post-traumatic stress disorder, said any delay in state disability payments would be devastating for her and her brother, who suffers from cerebral palsy. Magers said monthly checks totaling more than $1,700 that they receive are barely enough to cover their rent, utilities and food.
"We don't qualify for food stamps and we're often short on food at the end of the month," said Magers, 57, of Sacramento, who added that she often asks her grandchildren to bring their own food when they visit.
Despite California's prolonged fiscal mess, Schwarzenegger and the Legislature have been unable to find middle ground on how to close an expected $42 billion budget deficit, which includes about $2 billion in reserves, through June 2010.
Schwarzenegger and legislative leaders met again Friday to hammer out a budget deal, but it was not clear whether they were close to striking a compromise.
"The governor has been saying for months that the longer we wait to solve the deficit, the worse the problem becomes, which is exactly why the Legislature needs to pass a compromise budget immediately," said Aaron McLear, a spokesman for Schwarzenegger.
Senate President Pro Tem Darrell Steinberg, D-Sacramento, said in a statement that he expects negotiations to continue through the weekend to "avert the cash crisis so that Californians can continue to receive vital services."
Jennifer Gibbons, a spokeswoman for Assembly Republican leader Mike Villines of Clovis (Fresno County), said Republicans were "working closely with our colleagues to get something done as soon as possible."
'This will hit us hard'
George Usi, 36, president of Sacramento Technology Group, hopes a solution is near. His 5-year-old firm is supposed to receive about $360,000 worth of payments in February from the state for a variety of information technology services including ensuring the security of vital health care data.
"We can probably survive an extra 15 days to 30 days without payment, but this will hit us hard," he said.
Chiang acknowledged that delaying payments would be devastating for thousands of poor and disabled residents who depend on cash assistance from the state, and would create hardship for vendors that do business with the state agencies.
But unless the governor and the Legislature agree on a plan to stem the flow of red ink soon, Chiang said he won't have any choice but to make the hard decisions on who gets paid and when.
California's fiscal free-fall has been so swift that the $16.5 billion of special funds that are typically used for internal borrowing have run dry as well as the $5 billion in short-term loans that the state took out a few months ago, he said.
Without delaying payments, the state would be $346 million in the red next month, $3.55 billion in March and $5.21 billion in April.
Delaying $3.7 billion in payments would get the state through February and most likely March, but the state's cash balance would plummet $2.37 billion in the red by April, he said.
Withholding public funds, especially the tax refunds, would be devastating not only to individuals, but would be counter to the recent mantra of economy stimulus, Chiang said.
"It will prolong the pain, the agony, and it will delay our economic recovery here in the state of California," he said.
E-mail Matthew Yi at firstname.lastname@example.org.