No End In Sight To California's IOUs

California began sending IOUs last Thursday to some of its creditors as well as to taxpayers because of the state's $26.3 billion budget deficit. Reporter Carolyn Said of the San Francisco Chronicle says the situation is likely to continue until the governor and the legislature can fix the deficit.

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ROBERT SIEGEL, host:

To California now, where some taxpayers have been getting a little reminder of their state's budget woes in the mail in the form of an IOU. The state has issued more than $87 million in IOUs since Thursday. The IOUs mature in October. For those who can wait that long, it's not a bad deal. The state will pay an annual interest rate of 3.75 percent on the IOUs.

If you have an IOU, banks, including Wells Fargo and Bank of America, will let you deposit it, but only this week, even if the state goes right on issuing IOUs.

Well, I'm joined now by reporter Carolyn Said of the San Francisco Chronicle who's written about this. And first, what are these IOUs for? Are we talking about tax refunds, payments to vendors, what?

Ms. CAROLYN SAID (Reporter, San Francisco Chronicle): That's exactly what it's for. They're for tax refunds to individual taxpayers and payments to vendors who provide all kinds of goods and services to the state ranging from - I talked to a little company that provides French fries to the prison system and another company that pumps out the latrines in state parks, and they expect to be getting IOUs instead of actual checks.

SIEGEL: And this is because of the budget crisis in Sacramento.

Ms. SAID: Exactly. There are some payments the state is legally obligated to pay. It still has to make its payroll and it still has to pay the schools. So, in order to conserve enough money to make those legally mandated payments, it's making its other payments with IOUs.

SIEGEL: Any idea how long California will continue issuing IOUs?

Ms. SAID: Well, that's the $26.3 billion question, Robert.

(Soundbite of laughter)

Twenty-six point three billion being the amount of the state deficit that they have to figure out. So, until the governor and the legislators can figure out a solution to our $26.3 billion problem, they will probably have to keep issuing IOUs.

SIEGEL: Yeah, but what do people make of Wells Fargo and Bank of America saying, we'll take them, we'll let you deposit them but only until Friday?

Ms. SAID: Well, it kind of seems like maybe they're trying to play a little game of chicken with the state, and they're trying to do their little bit to light a fire under the state lawmakers and get them to come up with a solution before then.

SIEGEL: Now, I saw an ad on Craigslist that one of our colleagues directed us to. And it says, we buy California IOUs and give you cash immediately at 85 cents on the dollar. Who's offering that?

Ms. SAID: Well, there's a whole bunch of little entrepreneurs who have sprung up making these offers. And for right now, nobody is going to sell their IOUs because until Friday, they can deposit them at the bank for the full value. So, there's no point in only taking 85 cents on the dollar when you can get a hundred cents on the dollar at your bank.

But after Friday, if the banks will not take the IOUs and the state keeps issuing them, some people could be motivated to sell them. But these little businesses - I talked to one business where that the state owes her something in the high five figures, she provides personnel services to them. And she cannot make her payroll with an IOU, so she will have to try to sell it for less than face value.

And for the investor who does buy it, it could be a good deal because if they pay 85 cents on the dollar and then, come October, they get 100 cents on the dollar plus that 3.75 percent annualized interest rate, they've made a little bit of money.

SIEGEL: Carolyn, what has it done to people's confidence? This is a, I guess, a real East Coast statement, assuming there is any confidence left in the government of California. What does it do to confidence in the government that they're paying with script to their vendors?

Ms. SAID: Well, it doesn't really do a lot. I mean, you know, you can go back and look at, you know, different South American nations who have had to pay their vendors with script. You know, you can look throughout history at countries that have had to pay their vendors with script, and usually, those are countries that are on pretty shaky ground. So for California, the seventh largest economy in the world, to have to be paying with IOUs is quite a blemish on the Golden State.

SIEGEL: Carolyn Said, thanks a lot for talking with us.

Ms. SAID: Thank you.

SIEGEL: That's reporter Carolyn Said of the San Francisco Chronicle.

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