California will suspend tax refunds, various welfare payments, and well I can't keep up with all this, click and read. Next thing you know Californians may have to pay for their own botox…Oh yes, I looked again, California is also suspending student grant payments, swell for our business eh?
I mentioned this a few posts back. Arnold S was elected in a recall over former Gov Gray Davis as the state's finances worsened. Rather than really face the problem, Arnold caved to the legislature and began spending again. Well here we are, or here they are.
Do you suppose many companies are considering re locating to California? I don't think so.
I posed the question in my last post on this issue as to whether retailers would accept IOUs as cash. Well I was on the right track with that one, consider this quote.
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.
Gov Arnold is instituting such measures to conserve cash. Well this is getting, as we in academia like to say, academic. If a bank has to take an IOU as cash, think about the ramifications. That means the bank will then be, paying depositor interest on an IOU? Can you see the danger here? No doubt the banks are really nervous. Here is why. It is one thing to exchange IOUs within California, but suppose the depositor deposits a $100,000 IOU in the bank. Then the depositor writes a check for a loan payment to an out of state bank. The California bank of course will have to provide real cash, not IOUs to say the Texas bank that received the check on the other side of the transaction. The California bank cannot do this for very long or it will run out of its own cash. Come to think of it, no doubt the negotiations are all about this next scenario. Josie Californian deposits her IOU. She writes a check to her cousin in Texas Maria Texan. Maria cashes the check in Texas. When Josie comes to visit her, Maria hands Josie the real cash. Clearly this would result in a 'run' on California banks to change IOUs into cash by whatever means.
Gee this is a mess……
By 1976 New York City faced a similar situation. Again, the inability to negotiate a reasonable way out of their problems with city unions led to problems. Then New York City Mayor John Lindsay and successor Abe Beam asked for Federal Help. Initially Gerald Ford said no. Then he relented. The City technically did not default but…. the comptroller of J C Penny spent a year there sorting out NYC's finances.
Accounting note. If an external CPA auditor concludes a company cannot meet its obligations over the next year, a going concern statement is issued. It means just that, the company cannot be expected or there is serious doubt, that the bills can be paid. If California had a certified audit, it would face a going concern dictum. Gee am I glad we are in Texas…
Professor Elam 
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