California holds back payments amid budget crisis

SAN FRANCISCO (Reuters) - Like thousands of other Californians, Marcus Sanders would like a tax refund to help his family as recession tightens its grip on the economy and while he looks for full-time work.

When California’s state government will release its refunds, however, is uncertain.

The payments were due to start on Monday but State Controller John Chiang has said he will hold back the refunds for at least 30 days because the state must close a $15 billion shortfall in its current budget and needs its dwindling cash for more pressing payments, including debt service.

Sanders, a 46-year-old lawyer and corporate consultant in Antioch, California, who is getting by on contract work, said he appreciates the state’s financial predicament and would be willing to wait on a tax refund to help. But not every household may be able to afford to do the same, he said.

“Every bit of cash you get in a tight time, you’ll use it,” Sanders said.

Sarah Gilson of San Francisco also is concerned about Chiang’s decision. The recent law school graduate does not expect a tax refund but sees withholding them as a blow to the state’s already ailing economy and as lowering her odds of landing a job at a law firm.

“I don’t see how that stimulates the economy,” Gilson said. “People look at my resume and are impressed with what they see but they’re just not hiring.”

Gilson said she faces cutthroat competition. She said one law firm recently pulled a job notice from her law school’s job office within a few hours of posting it. The firm had received 400 applications.

“You’re not even getting reply e-mails thanking you for your application because so many people are looking for work that firms can’t process them,” she said.

California Governor Arnold Schwarzenegger delivers the State of the State address at the State Capitol in Sacramento, January 15, 2009. REUTERS/Max Whittaker


California has fallen on hard times. The housing slump and foreclosure crisis hit it harder than most other states and tumbling consumer spending in recent months has roiled its economy, the world’s eighth largest.

California’s unemployment rate jumped to 9.3 percent in December, well above its 5.9 percent a year earlier and the month’s national average of 7.2 percent. Economists predict the state’s rate will soon cross into double-digits, compounding its government’s financial troubles, rooted in worse a than expected fall in revenues.

One of the state government’s most pressing troubles is that its cash account will be tapped out within weeks unless Gov. Arnold Schwarzenegger and lawmakers close the state’s current budget shortfall -- then they must close the next fiscal year’s budget gap, projected at $25 billion.

California’s financial crisis has unnerved Wall Street -- it has warned of possible downgrades to the state’s already low general obligation bond rating -- and is adding to a gloomy outlook in storefronts, government offices, labor halls and corporate boardrooms across the state.

“Everybody is concerned about this. The state is on the edge of going into the abyss,” said Bill Hauck, president of the California Business Roundtable, which represents the state’s largest employers.


For businesses providing goods and services to the state, its thinning cash account is especially concerning as Chiang, in addition to withholding tax refunds, is planning to issue notes from the state promising payment instead actual payment.

With recession likely to drag on for some time and lenders tightfisted, companies doing business with the state government need reliable revenues, not promises, said Ruben Barrales, chief executive of the San Diego Regional Chamber of Commerce.

“Many of our members are bracing themselves,” Barrales said, adding that, “Some are questioning whether to go after state business ... or if they win a job to accept it.”

Subcontractors on state projects likewise are anxious because contractors many not be paid, said Andy Berg of the San Diego chapter of the National Electrical Contractors Association: “Contractors always say ‘I haven’t got the money because I haven’t got paid yet.’ At least this time they’ll be telling the truth.”

In anticipation of state IOUs, contractors are cutting hours for subcontractors or idling them, scrapping equipment orders and hoarding cash, Berg said.

For some the measures may be too little too late. “If you’ve done $5 million worth of work and you’re waiting for a paycheck, that’ll put some of the biggest contractors out of business,” Berg said.

Editing by Sandra Maler