California begins printing IOUs

California begins printing IOUs

Nearly 29,000 IOUs worth $53 million will be sent, mostly to residents awaiting tax refunds. Finance officials set the interest rate at 3.75% for banks that accept the vouchers.
By Eric Bailey and Patrick McGreevy

2:55 PM PDT, July 2, 2009

Reporting from Sacramento — Deep in debt and short on cash, California this afternoon started churning out its first batch of IOUs in nearly two decades amid grumbles from bankers, growing public outrage and scant progress in negotiations to solve the state's widening budget deficit.

The printing presses at 2 p.m. began to roll out the first of nearly 29,000 IOUs totaling more than $53 million, most of them destined for residents around the state still awaiting income-tax returns.

The unusual press run came just hours after a panel of state finance officials set the interest rate for the IOUs at 3.75% for banks and other financial institutions that are willing to accept the vouchers. Some banks have agreed to honor the paper, including Bank of America and Wells Fargo, which will do so until July 10.

Wells Fargo's agreement came with a nudge. "We are reluctant to take this step, but are doing so to help our customers who are not at fault and with the expectation that the Legislature and governor will complete the budget within days," Lisa Stevens, a bank executive in California, said in a statement.

Rodney K. Brown, president and chief executive of the California Bankers Assn., said the state's failure to resolve the budget crisis "has placed a tremendous burden on California's citizens, communities and banks."

The state's three-member finance panel voted 2 to 1 to set the interest rate, with the governor's representative on the board objecting, proposing instead a 1.5% rate, with a redemption date of June 2010.

Some smaller banks have not made a decision on accepting the IOUs. Recipients who don't have a bank that will cash them can redeem them Oct. 2, or sooner if the state settles on a final solution to its latest financial calamity.

The moves come little more than a day after state 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.

Outside the Capitol, the mood was grumpy. Richard Blitz, a 73-year-old owner of a downtown Los Angeles variety store, said the IOUs seem a hollow gesture by a state government struggling for answers.

"It's candy for a hungry man," he said. "Banks will accept it for a week or two, but what will happen after that?"

With the California economy hobbled, tax receipts waning and the budget deficit continuing to swell, the governor Wednesday declared a fiscal emergency and ordered state workers to take a third unpaid furlough day each month. He also issued a new list of cuts to schools and public universities to address a deficit that his finance team now says has swelled to $26.3 billion.

Schwarzenegger's latest cuts are designed to pare state spending by an additional $4.9 billion.