California’s irresponsible financial move

The Californian government has revealed that it has the financial know-how of teenagers with their first checking account.

California, with its poor spending habits and feigned ignorance of a bad economy, plans to pay its bills with IOUs, according to The New York Times.

But like teenagers and their checking accounts, California has forgotten the ramifications of overdrawing and overspending.

There are a slew of problems associated with the issuance of IOUs to pay California’s bills. Firstly, the IOUs undermine the integrity of California state debt. Secondly, they represent a gross mismanagement of California funds. Lastly, they give a terrible example for Californians on how they should act fiscally.

According to the Los Angeles Times, Standard & Poor’s has rated California the lowest debt rating of any state.

According to the same article, such decreases in debt rating cause an increase in interest rates in California-issued bonds. Issuing IOUs serves only to further undercut the credibility of California’s fiscal responsibility.

So in addition to the interest rate of 3.75 percent that will be paid on the IOUs, which could total up to $4.8 billion by August according to The New York Times, we may face further financial repercussions through an increase in the interest rates on bonds as a result of the budget mess. Between the interest on the IOUs and the possible decreases in credit rating, California will have an even heftier bill upon its hands once it comes time to pay up.

Also tied with this issue of debt credibility is the credibility of the state as a whole. California as a body has one of the highest GDPs in the entire world. To allow such an important state to pay with IOUs is irresponsible and sets a bad precedent.

Giving out IOUs is an unheard of process. According to The New York Times, California is the only state known to have paid with IOUs in the past, and even now this is only the second time that it has happened since the Great Depression.

While the recession is serious, it is no excuse for mismanagement of state funds and a failure to balance the state checkbook. Instead of waiting until the last minute to rely on IOUs, the state should have taken preventative measures to forgo such a situation.

The extremity of this situation represents just how badly our elected officials in Sacramento have been acting. Rather than focusing on a balanced budget, each side of the political spectrum has focused on passing its own measures without showing any willingness to compromise and bring the budget into line.

Without compromise and the ability to put fiscal responsibility at the forefront of important issues, the greatness of this country will be greatly diminished. Without an adequate financial system, this country will not be able to thrive. A key part of the financial system lies in the ability to trust debts and promised payments.

A more subtle consequence of the IOUs also exists. This is the example that California is setting. People need to understand that they must balance their checkbooks and pay their taxes on time.

By issuing promises instead of cash, California shows that it is not important to prioritize expenses or to cut back in spending. In a recession where there needs to be a lot of belt-tightening, the Californian government does not seem to want to cut back in any area at all.

Setting the right example, although difficult, is necessary and important to impart upon the citizens of California just how important fiscal responsibility is.

California will get out of this recession and will return to normal business again. But this situation should serve as an example.

Our government must realize that it must compromise even on the most difficult issues and that it should be prepared for future recessions and financial issues.

Rather than allowing political stagnation, there should be an effort by both the people and the legislators to show that a sustainable budget is possible.

E-mail Feeney at [email protected].