updated 1/16/2009 5:54:32 PM ET 2009-01-16T22:54:32

California's controller said Friday he will be forced to impose a 30-day delay on tax refunds and some other payments starting Feb. 1 if lawmakers fail to agree on a plan to erase a nearly $42 billion budget deficit.

Controller John Chiang, who acts as the state's accountant, said he will have no choice but to delay $3.7 billion in payments next month because the state is running out of cash.

Doing so, he said, would buy the state a few more weeks before its accounts run dry. The state is on the brink of issuing IOUs as it faces a $41.6 billion shortfall over the next year-and-a-half.

"Let me make this perfectly clear: This is a painful decision," Chiang said during a news conference in Sacramento. "It is an action that is critically necessary. The fallout from issuing IOUs, or for the state going into default, are significant and long-lasting and something to be avoided at nearly all costs."

Money freed to pay bills
In another budget-related development, a state investment board on Friday freed up $650 million to pay construction bills for public works projects, less than a month after freezing nearly $4 billion of infrastructure spending.

A severe drop in revenue from sales, property and capital gains taxes has left the state's main bank account depleted. The state has not had a positive cash balance since July 12, 2007, Chiang said.

The state had been relying on borrowing from special funds and Wall Street investors, but those options are no longer available.

Chiang said his office must continue $6.6 billion in education and debt payments next month but will defer money for tax refunds, student aid, social services and mental health programs.

Of the $3.7 billion in delayed payments, an estimated $1.9 billion will come from personal income tax refunds and $81 million from bank and corporate tax refunds.

Under the law, the state does not have to issue tax refunds until May 30, but the state usually cuts checks as it processes returns.

Delay could add to economic pain
Chiang said delaying tax refunds and payments to counties for supporting poor families will only exacerbate the weak economy. People will not be able to use their tax refunds to buy cars or pay bills, he said.

Paul McIntosh, executive director of the California State Association of Counties, said many counties already are low on reserves and may have to shut down welfare offices or end drug and mental health treatment programs at a time when applications are up 22 percent statewide.

Sacramento resident Sherlie Magers, 57, who suffers from bipolar disorder, said she lives off $900 a month from a disability check.

"I do not know what we will do if the state cannot make its payments," Magers said. "We will not have money for food. Our gas and utilities will be cut off."

'Debts ... we really have to pay'
While Chiang warned of payment delays, the California Pooled Money Investment Board agreed to ease its suspension of public works funding.

The board voted 3-0 to allow the state to spend $650 million to pay construction bills that were incurred before the freeze was imposed on Dec. 17.

The money will be used to cover administrative costs and pay bills for a variety of transportation, park and water projects.

"These are debts we think we really have to pay," said state Finance Director Mike Genest, one of the board members.

The board's chairman, state Treasurer Bill Lockyer, and Genest said the Department of Finance and the state controller would determine which projects get the money.

Last month, the board voted to hold up nearly $4 billion in funding for more than 5,000 projects ranging from carpool lanes to classrooms. Board members said the money was needed for other programs because of the state's cash shortage.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments