If the stigma of issuing IOUs triggers a budget deal in the coming days, Gov. Arnold Schwarzenegger might find redemption in his strategy of quashing a stopgap solution that would have avoided those non-cash payments.
But if no budget deal emerges soon, Schwarzenegger will have helped saddle the state with a lower credit rating and have nothing to show for it.
As a negotiating strategy, Schwarzenegger is counting on public pressure to mount against the Legislature as California issues IOUs today for only the second time since the Great Depression. The Republican governor could have backed legislation to avert IOUs this week, but he demanded that lawmakers solve the entire budget problem, which grew Wednesday to $26.3 billion.
The state plans to begin paying local governments, businesses and taxpayers with IOUs – formally called registered warrants. The move will hurt the state's already dismal credit rating and incur high interest costs, all the while highlighting California's fiscal failure.
Schwarzenegger and lawmakers alike sought to reach a complete $24 billion budget deal by Tuesday. But as it grew clear how far apart Democrats and Republicans were on taxes and spending cuts, lawmakers fashioned a smaller solution to cut $3.3 billion in school spending that would have preserved enough cash to allow the state to pay its bills.
The governor didn't buy it, however. He enlisted support from Senate Republicans, who ultimately blocked the stopgap plan from reaching his desk.
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