POL: California's IOU

[Galaxy]

I'm not looking to bash on California (they get enough as it is) or turn this into a flame war, but I got to thinking today about California's I.O.U.'s. How are the I.O.U's constitutional?

Section 1, Article 10 (Contract Clause) reads:

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

[SackAttack]

I'm not looking to bash on California (they get enough as it is) or turn this into a flame war, but I got to thinking today about California's I.O.U.'s. How are the I.O.U's constitutional?

Section 1, Article 10 (Contract Clause) reads:

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

Well...California's been on iffy ground on the Treaty stuff in the past, although I don't think it's ever been challenged. They aren't coining Money, at least deliberately, although I gather there are some institutions and individuals willing to treat the IOUs as legal tender for payment of debts (which suggests they think it's going to get backed up somehow). The IOU itself isn't a Tender in Payment, but rather a promise to tender, in payment, the amount owed in the proper form at some later date.

But it seems like the Tender in Payment clause is the one that might trip them up if anybody is inclined to challenge it in court.

[Galaxy]

Well...California's been on iffy ground on the Treaty stuff in the past, although I don't think it's ever been challenged. They aren't coining Money, at least deliberately, although I gather there are some institutions and individuals willing to treat the IOUs as legal tender for payment of debts (which suggests they think it's going to get backed up somehow). The IOU itself isn't a Tender in Payment, but rather a promise to tender, in payment, the amount owed in the proper form at some later date.

But it seems like the Tender in Payment clause is the one that might trip them up if anybody is inclined to challenge it in court.

It would just be interesting to see if the I.O.U's would hold up in court if someone were to challenge it.

[SackAttack]

And I wonder if they'd ever see the money they were owed if the state filed for bankruptcy.

Seems like a challenge might be a double-edged sword there.

[rowech]

You guys are acting like The Constitution still matters.

[JPhillips]

I think the key is that no one is forced to accept them as tender. Many banks are accepting them, but they are not legally required to do so. The IOUs are more along the lines of a sweepstakes letter promising that you've won a sum of cash.

[panerd]

Go back two articles and explain the Federal Reserve.

To answer your question... either they will have to raise taxes (not popular with one side), cut programs (not popular with the other), or violate the constitution. (nobody cares about that)

[Mizzou B-ball fan]

I think the key is that no one is forced to accept them as tender. Many banks are accepting them, but they are not legally required to do so. The IOUs are more along the lines of a sweepstakes letter promising that you've won a sum of cash.

I had read that the banks may not take IOU's this time around, which was causing the increased concern in the last month or two that the state may need to finally cut the spending.

[lcjjdnh]

And I wonder if they'd ever see the money they were owed if the state filed for bankruptcy.

Seems like a challenge might be a double-edged sword there.

As it turns out, states aren't actually allowed to file for bankruptcy.

[lcjjdnh]

Just to clarify my previous post, I should say states can't file for bankruptcy under the rules as we know it. Chapter 9 bankruptcy only applies to municipalities--states were intentionally excluded.

[fantom1979]

You guys are acting like The Constitution still matters.

+1

I just read it cover to cover over the weekend. There is a lot of stuff in there that just seems to get ignored these days.

[cartman]

I had read that the banks may not take IOU's this time around, which was causing the increased concern in the last month or two that the state may need to finally cut the spending.

Even if they cut 100% of discretionary spending, that still wouldn't fix the underlying problem of an unstable tax revenue stream. The bulk of the state's tax revenue comes from income taxes and capital gains taxes, which can, as the current economic climate has shown, drop rapidly in times of recession.

[Mizzou B-ball fan]

Even if they cut 100% of discretionary spending, that still wouldn't fix the underlying problem of an unstable tax revenue stream. The bulk of the state's tax revenue comes from income taxes and capital gains taxes, which can, as the current economic climate has shown, drop rapidly in times of recession.

Gotcha. I'm sure the bubble bursting on the real estate values has created a pretty big hit on property tax revenues.

[cartman]

Gotcha. I'm sure the bubble bursting on the real estate values has created a pretty big hit on property tax revenues.

Acutally, no. Back in the 70s, CA property tax rates were capped at 1%, and are a very small part of the revenue stream.

[Fighter of Foo]

+1

I just read it cover to cover over the weekend. There is a lot of stuff in there that just seems to get ignored these days.

You're not imagining, it IS ignored except when someone in power feels like referencing it.

[Fighter of Foo]

Go back two articles and explain the Federal Reserve.

To answer your question... either they will have to raise taxes (not popular with one side), cut programs (not popular with the other), or violate the constitution. (nobody cares about that)

The option you don't mention (and almost no one else does either) is cutting personnel & entitlements. Had the government grown at the same rate of population, it wouldn't be bankrupt. I think I read somewhere that CA's government expenditure has increased 30% in the last decade. That's fucking ridiculous.

Of course, no one IN government is going to support cutting their own benefits & salary unless absolutely necessary and I imagine that won't happen for a while, so look for more of these bandaids in the near future.

[rowech]

+1

I just read it cover to cover over the weekend. There is a lot of stuff in there that just seems to get ignored these days.

Sad isn't it? Both parties in Washington have totally destroyed so many parts of it so that what we're seeing now in no way represents anything close to what was desired.

[Mizzou B-ball fan]

Acutally, no. Back in the 70s, CA property tax rates were capped at 1%, and are a very small part of the revenue stream.

Any chance they reconsider that to diversify their revenue stream?

[JPhillips]

Any chance they reconsider that to diversify their revenue stream?

It would be next to impossible to overturn the property tax cap instituted by Proposition 13 as it's now a part of the Constitution and would take another referendum to change it.

CA is a great warning to the rest of the nation that when a supermajority is needed to raise revenue, but a simple majority can raise spending, while public referendums lock spending into the Constitution a disaster is bound to happen sooner or later.

[Mizzou B-ball fan]

It would be next to impossible to overturn the property tax cap instituted by Proposition 13 as it's now a part of the Constitution and would take another referendum to change it.

CA is a great warning to the rest of the nation that when a supermajority is needed to raise revenue, but a simple majority can raise spending, while public referendums lock spending into the Constitution a disaster is bound to happen sooner or later.

Interesting. I had no idea it was set up in that manner.

[MacroGuru]

I do have to say, my last foray into California this past week was less than stellar as far as a sales perspective goes, the thing that was troubling to me was talking to the state employees that I did that truly did not know if they had a job / paycheck coming up this month because of the states situation.

Listening to the news there I wasn't thoroughly shocked though...truly someone needs to call the state out on the IOU immediately and let them figure out a "responsible" way to handle their situati

That's as good as money, sir. Those are I.O.U.'s.

[SackAttack]

It would be next to impossible to overturn the property tax cap instituted by Proposition 13 as it's now a part of the Constitution and would take another referendum to change it.

CA is a great warning to the rest of the nation that when a supermajority is needed to raise revenue, but a simple majority can raise spending, while public referendums lock spending into the Constitution a disaster is bound to happen sooner or later.

+∞

[SackAttack]

Interesting. I had no idea it was set up in that manner.

Yeah. Has been for a while, but it really blew up in the last ten years or so, at least as far as the lock-spending-into-the-Constitution-by-referenda bit goes.

Although it's a very small part, it still played a role in my decision to leave. I just don't see things there getting any better in the next five years barring something really, really drastic happening.

[JediKooter]

The problems here in California do not fall squarely on Prop 13. Both sides of the political fence have done their fare share of creating the quagmire my state is currently in. However, neither side wants to take the responsibility and the possible political career killing steps that are needed to 'right the ship'.

[Galaxy]

It's quite sad that my state, New York, is just as bad as California. The State Senate has been at a stalemate for what is going on 30 days. They have not been working. Quite sad.

[dawgfan]

Even if they cut 100% of discretionary spending, that still wouldn't fix the underlying problem of an unstable tax revenue stream. The bulk of the state's tax revenue comes from income taxes and capital gains taxes, which can, as the current economic climate has shown, drop rapidly in times of recession.
Sales taxes are no better in this regard - Washington has a sales tax and no income tax, and tax revenue fell sharply when the economy went in the tank. Because this state isn't quite as restricted as California in terms of taxing & spending provisions, we were able to submit a balanced budget this year, but it was painful (especially to higher education).

[Mizzou B-ball fan]

Looks like there are some in the legislature considering an overhaul to the tax code to a flat tax......

Democrats for a Flat Tax? - WSJ.com (http://online.wsj.com/article/SB124726545081325435.html)

[JPhillips]

It's frustrating to see eliminating marginal rate brackets confused with simplicity. It isn't hard to look at a chart and see what taxes are owed. The complexity in the tax system comes from the volume of credits/deductions/exemptions and their various rule sets. No where in that opinion piece do they actuality talk about making tax preparation simpler.

[QuikSand]

Section 1, Article 10 (Contract Clause) reads:

"No State shall ... make any Thing but gold and silver Coin a Tender in Payment of Debts"

Great example of why founding documents of our country need to be interpreted as part of an active judiciary. A literal reading of this language would clearly render our country's use of paper money (literally nothing more than the paper it's printed on, not even as formal as an I.O.U.) unconstitutional.