SACRAMENTO — The state will suspend tax refunds, welfare checks, student grants and other payments owed to Californians starting Feb. 1, Controller John Chiang announced Friday.
Chiang said he had no choice but to stop making some $3.7 billion in payments in the absence of action by the governor and lawmakers to close the state's nearly $42-billion budget deficit. More than half of those payments are tax refunds.
The controller said the suspended payments could be rolled into IOUs if California still lacks sufficient cash to pay its bills come March or April.
"It pains me to pull this trigger," Chiang said at a news conference in his office. "But it is an action that is critically necessary."
The payments to be frozen include nearly $2 billion in tax refunds; $300 million in cash grants for needy families and the elderly, blind and disabled; and $13 million in grants for college students.
Even if a budget agreement is reached by the end of this month, tax refunds and other payments could remain temporarily frozen. Chiang said a budget deal may not generate cash quickly enough to resume them immediately.
Not all payments will stop Feb. 1. Most school and healthcare programs will be paid, as required by state and federal law. The state will continue to pay more than $6.6 billion in such bills.
And Los Angeles County officials said they would cover welfare payments to more than 500,000 local recipients -- for now.
But California is projected to be $346 million short of the funds it needs to pay all its bills in February. By March, the state would be so far in the red that even continuing to suspend payments would not cover the shortfall. California would be insolvent, making the issuance of IOUs likely.
State officials have already designed an IOU template, Chiang said, and have been negotiating with banks over whether taxpayers could cash or deposit them if they are issued. The state could be forced to pay as much as 5% interest on delayed tax refunds if they are not paid by the end of May, Chiang said.
The last time the state issued such IOUs -- the only time since the Great Depression -- was in 1992.
The suspension of payments is the latest radical move by officials to help keep the state from running out of cash as Gov. Arnold Schwarzenegger and the Legislature battle over how to avoid insolvency.
