State & University Employees Could End Up With IOUs in Paycheck in 2010

PHOENIX— State and university employees could wind up with IOUs in their pay envelopes instead of checks in February if the planned sale of state buildings hits a snag, state Treasurer Dean Martin warned Monday.

And that could leave worker with a piece of paper that won’t help them buy food for their families, pay the mortgage or heat their homes.

Martin told legislators that by the end of January the state will have borrowed about $1.1 billion to pay its bills. The total amount Martin has available, both internally and from Bank of America, is $1.2 billion.

But the state is obligated to make a payment of about $325 million to public schools on Feb. 1.

What’s supposed to happen around the third or fourth week of January, Martin said, is the state will sell off — at least in title only — a dozen state buildings in exchange for at least $737 million. Martin said that will provide enough operating capital to keep the state going and, more important, to ensure that the payroll checks and bill payments that are sent out are good.

“Should that not happen, should there be a hiccup, a sneeze, something, anything gets lost in the mail, we will not be able to make the February school payment,’’ Martin said.

“There’s just not enough cash,’’ he continued. “The credit cards are maxed out, you’re at your limit.’’

That leaves him only one legal option for paying those to whom the state owes money: IOUs.

“They’ll get a note saying, ‘We’ll give you the money on this date,’ up to 90 days’’ in the future.

The state would be obligated to pay interest. But Martin said it likely would be the same discounted annual rate he got from Bank of America for the state’s line of credit: about three-fourths of a percent.

“The bigger issue is what that does to the economy,’’ he continued. “You put 30,000 state employees without paychecks, the trickle effect throughout the economy, what that does to the vendors, it needs to be avoided.’’

California issued IOUs earlier this year while it was trying to get its finances in order.

The banks did cash those — for a while. But Martin said the chances of banks honoring the IOUs here are minimal, as the state already is borrowing just to cover the checks it already is writing.

The treasurer’s warnings came as lawmakers sought some answers about the state’s finances.

Legislators know that the current anticipated deficit for this year stands at about $1.6 billion, even with the spending changes made last month, because sales tax collections have been so much weaker than a year earlier as consumers buy less and construction is slowed. And Richard Stavneak, staff director of the Joint Legislative Budget Committee, said the state is on track for a $3 billion gap between revenues and spending next year.

What they wanted to know was how the state manages its finances while trying to come up with a fix.

Stavneak said the temporary sales tax hike being pushed by Gov. Jan Brewer won’t do much, if anything, to help the current mess.

He said that levy could bring in up to $950 million a year. But if an election isn’t conducted until March, it might not be until May or even June before the increased collections show up in the treasury; the fiscal year ends June 30.

That leaves the state struggling to pay its bills in the interim.

Lawmakers approved a plan earlier this year to sell off state buildings for up-front cash and then lease them back. The plan is more akin to a mortgage, with investors buying shares in that $737 million debt in exchange for some rate of return over the next 20 years.

In the interim, Martin has obtained a $700 million line of credit from Bank of America. He also has access to about $500 million from various internal accounts, money that doesn’t belong to the treasury.

And when that’s gone?

“You send out the IOUs,’’ he said.

Martin said he probably can finesse the debt if it looks like the sale of the buildings will take place within a few days after the school payment is due. But if there’s some legal or other impediment to completing the sale, he can only send out IOUs.

“That’s what the statutes require,’’ he said.

There is another legal option: Delay the payment to schools. Martin said though, that would require legislative action.

But he said that’s not a solution, as the schools then would have to borrow money themselves — and agree to pay interest — to meet their payroll and other obligations until the state finally came up with the cash it owes.

“Essentially what you would be doing is shifting the state’s borrowing off to the schools,’’ Martin said. He said that, from a political perspective, lawmakers likely would agree to pay any interest costs the schools incurred.

Howard Fischer, Capitol Media Services

Information from: http://www.aztreasury.gov/media/2009/DouglasDispatch-12-08-09.html, Douglas Dispatch

State Treasurer Criticizes Sale of State Capitol Buildings

State Treasurer Dean Martin, who is considering runnng for governor next year, lambasted the state’s plan to sell certain state properties to generate fast cash and then lease them back.

He implied that lease-purchase programs are a budget gimmick that weakens finances and erodes respect for Arizona.

“It makes us look like Rent-A-Center,” he said Wednesday in a speech at the Sheraton Wild Horse Pass Resort & Spa. He was the keynote speaker at a convention of the Arizona Agents Alliance Association, a group of independent insurance agencies.

Gov. Jan Brewer on Sept. 3 signed a part of the budget that allows the state to sell properties. Among the possibilities are the House and Senate buildings at the Capitol, the State Hospital and state fairgrounds. Government functions at those sites would continue. The state has made sale/leaseback deals in the past. But apparently this is the first time the state has earmarked revenue from the sales to finance general government operations.

The state can sell a building only once, he noted.

“Do you want to invest in a state that’s renting its Capitol building?” he asked.

“It’s a temporary solution,” he said. “Even if it gets us through this recession, we’re going to be in the same boat for the next recession.”

Also creating a solid rainy-day fund to help the state weather future recessions would be prudent and would build confidence in Arizona, he said.

As it is now, he fears that companies leaving California will skip over Arizona and head for Texas. He said Arizona’s infighting, its lack of a balanced budget put together on solid principles and its lack of foresight does not engender confidence in the state.

He also criticized Brewer’s veto of the repeal of the equalization property tax.

The tax, also referred to less often as the County Education Property Tax, was suspended three years ago by the Legislature.

The bill sent to the governor this year would have permanently repealed the tax, but she vetoed it.

The tax applies to businesses and homes. Rep. Steve Yarbrough, a Republican from Districtc 21, warned about the possibility of the cancellation of a permanent repeal when he spoke in January 2008 at a legislative breakfast in Chandler.

The tax means about $77 more to be paid on a home worth $200,000, he said then.

“There’s never a good time to raise taxes, but this is the worst possible time,” Martin said Wednesday. Legislative leaders and Brewer need to “stop infighting and start solving problems, to start planning and thinking long term,” he said.

He criticized the current state budget, which is close to a billion dollars in the red and which Martin said is cobbled together.

The dithering is costing taxpayers, he said.

“The quicker you solve the budget problem, the cheaper it is,” he said.

Martin recommended starting to balance the budget by taking a hard look at entitlement programs.

“We’ve been growing welfare spending while cutting education and public safety,” he said.

Ten years ago, ACCCHS, the state’s low-income health care program, had a budget of $200 million; today is more than $1.5 billion, he said.

The ACCCHS budget is growing 75 percent faster than the rest of the state budget, he added.

Martin was elected state treasurer in 2006. He served six years in the state Senate, where he was chairman of the Finance Committee.

By Luci Scott

Information from: http://www.aztreasury.gov/media/2009/AZCentral-09-09-09.html