California prints up IOUs
Interest-paying warrants redeemable on Oct. 2
SACRAMENTO, Calif. – Deep in debt and short on cash, California on Thursday churned out its first batch of IOUs in nearly two decades amid grumbles from bankers, growing public outrage and scant progress in negotiations to resolve the state’s widening budget deficit.
The state controller’s office began rolling out nearly 29,000 IOUs totaling more than $53 million, most destined for residents around the state still awaiting income-tax refunds. Recipients also include some pensioners, health clinics, college students and many others who get checks from the state.
“We never thought we would do it again,” said Dorothy Cottrill, who manages check disbursement at the state controller’s office and still remembers the last time the state spun out IOUs, in the lean days of 1992.
The unusual move came just hours after a panel of state finance officials set the annual interest rate for the IOUs at 3.75 percent for banks and other financial institutions willing to accept the vouchers. Some banks, including Bank of America, Citi and Wells Fargo, have agreed to honor the paper, but only until July 10. Many recipients could receive their IOUs after that date.
Those who don’t have a bank that will cash the IOUs can redeem them from the state Oct. 2, or sooner if officials settle on a solution to the financial crisis.
State officials estimated that without a budget resolution they will have to issue $3.2 billion in IOUs in July and $1.65 billion in August.
State Controller John Chiang said the IOUs “are a sign that the state is being fiscally mismanaged” and a precursor to further credit downgrades for California, already the lowest-rated state on Wall Street.
The IOUs come two days after Senate Republicans, with the support of Gov. Arnold Schwarzenegger, blocked an eleventh-hour attempt by Democratic leaders to push through budget proposals that would have staved off the IOUs, at least temporarily.
Outside the Capitol, the mood was cross.
Thomas Bent, medical director of the Laguna Beach Community Clinic, expects to receive more than $10,000 in IOUs and may be forced to dip into reserves after the big banks stop accepting them.
“I can’t pay bills with IOUs,” Bent said. “I can’t pay salaries with IOUs.”
The governor and legislative leaders remained divided on several fronts. Schwarzenegger wants to save money by tackling fraud and waste in the state’s health and welfare programs and to deflate state worker pensions. Democrats are pressing to retain as much as possible of the state’s social safety net: welfare, children’s health insurance, in-home support for the elderly and other programs.
The governor said during an appearance in Los Angeles that lawmakers apparently have decided “it is more important to protect state employees and to protect all of the different people and labor and special interests, rather than protecting … the people of California, the taxpayers.”
A downcast Assembly Speaker Karen Bass, a Democrat from Los Angeles, blamed Schwarzenegger for linking a budget solution to his push for a government overhaul.
“Frankly, I have really begun to be concerned,” Bass said, adding that Schwarzenegger’s priority seems to be “fixing his legacy.”