In the mid 1800s, California was the destination for those seeking untold wealth buried beneath the earth. The Gold Rush lured thousands of settlers to the West Coast with the promise of immense riches, earning California the title of the Golden State. Today, California has become the not-so-golden state. In fact, with every day that passes, California sinks further in debt. And instead of luring modern-day prospectors (entrepreneurs), productive businesses—the engine of the state’s economy—are fleeing the state.
Governor Arnold Schwarzenegger and legislative leaders continue to meet behind closed doors, hammering out details of a budget agreement that will close the massive $26 billion state deficit. In an address to the legislature last month, Schwarzenegger lamented that unlike Washington, D.C., which faces its own swelling deficit, California cannot print its way out of its fiscal crisis. “We are not Washington,” he said. “We cannot print money. We cannot run up trillion-dollar deficits. We can only spend what we have.”
Earlier this month, State Controller John Chiang began issuing registered warrants, or IOUs, because the state has no money to pay its mounting bills. In July alone, it’s estimated the state will issue over $3 billion worth of IOUs. California law mandates those issued IOUs to accept the document as full payment for a debt. It also requires IOU recipients to pay taxes on the IOU as though it is actual payment from the state.
Businesses and taxpayers are essentially carrying the state government’s deficit by receiving these IOUs as payments. But unlike the government, businesses and taxpayers cannot in turn issue their own IOUs to their creditors without risking their own fiscal collapse. In the real world, only trustworthy currency will settle a debt.
Recognizing the hypocrisy of this situation, and coming to the rescue of taxpayers, was Assemblyman Joel Anderson (R-San Diego). Anderson introduced AB 1506, legislation that will require the state to accept its own IOUs as payment from businesses and citizens. Business and taxpayers could then use the IOUs to pay off their taxes, DMV fees, even school tuition.