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IOU? FAQ!

Despite legislators working late into the night Tuesday to head off further budget disaster, the state controller's office says it will begin issuing IOUs on Thursday for the first time since 1992 if the governor and Legislature haven't come up with a budget fix.

The interest rate for the IOUs has not been set and won't be until Controller John Chaing meets with his advisory committee Thursday and so far, no bank other than the legislator's own, the Golden 1 Credit Union, has agreed to honor the IOUs.

 

If the state starts sending out IOUs, who will get them, how will they work and will you be able to use them to pay your bills? The Los Angeles County Business Federation offers the following Q&A, excerpted from an article in the San Francisco Chronicle:

Q: What is an IOU?

A: Normally, the state pays its bills with "regular warrants," which are checks that can be cashed immediately. If the state doesn't reach a plan that will put cash in the Treasury by

Thursday, the controller will begin issuing more than $3 billion in IOUs to pay some of its July bills, says Garin Casaleggio, a spokesman for Controller John Chiang. The state will pay off the IOUs on Oct. 1, assuming there is enough cash in the Treasury by then. The IOUs will pay tax-free interest at a rate that will be set on Thursday.

Q: How will they look?

A: The IOUs will look like regular state checks except they will be printed on darker green paper and bear the issue and maturity dates and the word "registered."

Q: Will the state pay everything with IOUs?

A: No. The state Constitution, federal laws or court orders prevent some IOU payments.

The state will continue making regular payments to schools (kindergarten through college) and to debt holders because the Constitution gives them priority. The state also must continue making regular payments to state employee and teacher pension plans, in-home supportive services and Medi-Cal providers. Without a budget fix, the controller expects to issue roughly $3 billion in IOUs and $11 billion worth of regular payments in July.

Q: Who will get IOUs?

A: The state would use IOUs to pay:

-- Businesses that contract with the state.

-- People and businesses getting income tax refunds.

-- The Student Aid Commission, which makes Cal Grants to college students.

-- Social service programs including CalWORKS, mental health, drug and alcohol  programs.

-- The state's portion of Supplemental Security Income and State Supplementary Payment programs for blind, disabled and low-income seniors. However, the federal government will pick up the state's unpaid share and the state will reimburse the federal government.

Q: Can I cash in an IOU before Oct. 1?

A: The state will not redeem them before Oct. 1. However, the IOUs are negotiable, which means they can be sold or transferred to another party as a form of payment. In 1992, many banks in California cashed them for customers initially, but many stopped after the first month. Some banks said the 5 percent interest rate was not enough to justify the hassle; others wanted to spur the state to end its budget impasse. Wells Fargo and Bank of America have not decided whether to accept IOUs this time. In an e-mail, BofA says it would need "much greater specificity about rates, timelines, terms and many other variables" before it could make that decision. A spokeswoman for the California Bankers Association says she doesn't think any of its members have decided whether to accept them.

Q: When would the state stop issuing IOUs?

A: "When there is enough money to pay all our bills," including any outstanding IOUs, Casaleggio says.

For more information, go to the state controller's Q&A at www.sco.ca.gov/5935