S.F. companies brace for state IOUs
Wire reports
July 3, 2009
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| Dorothy Cottrill, of the state Controller's office, inspects some of the first of an estimated 50,000 registered warrants to issued, in Sacramento, Calif., Thursday, July 2, 2009. The inability of Gov. Arnold Schwarzenegger and state lawmakers to reach a compromise on a balanced budget, and a $26.3 billion budget deficit has forced Controller John Chiang to issue IOUs for the first time since 1992. (ASSOCIATED PRESS) |
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SAN FRANCISCO — In San Francisco, several tech companies that do business with California are bracing for a holdout.
The California controller started paying companies in San Francisco, and across the state, with IOUs on Thursday, after lawmakers failed earlier this week to address a $26 billion budget deficit. The IOUs primarily will affect the thousands of small businesses that contract with the state for a variety of services, including providing office supplies, technology products and cleaning services.
Omnipro, an India Basin-based information technology company, provides products and services to California departments such as Corrections and Employment Development.
The company will still provide some services to the state on an IOU basis, according to Steve Garcia, vice president of sales. He’s been through these budget showdowns before — Omnipro has contracted with the state for about 15 years — and is not panicking.
“Usually this only lasts about 30 days until the budget comes together,” Garcia said. “In the meantime, we provide services on a case-by-case basis.”
Another plus for companies that do business with the state is that this is a slow time of the year, he said. Buying tends to decrease at the end of the fiscal year.
California will be charged an interest rate of 3.75 percent on the IOUs and has promised to repay by October.
The first batch of 27,000 IOUs worth $53 million were being mailed today, mostly to residents owed tax refunds, the Controller’s Office said. By the end of July, Controller John Chiang estimates he will have issued more than $3 billion worth of IOUs, paying at least $20 million of interest that is exempt from federal and state income taxes.
California has been battered by a recession that caused its revenue collections to tumble by $13 billion to $73 billion in the 11 months through May from a year earlier, according to the Controller’s Office.
On Wednesday, the governor declared a fiscal state of emergency and ordered most state offices to close three days a month to conserve cash.
Schwarzenegger said Thursday he would not sign any bill that comes to his desk unless it pertains to the budget. Under the fiscal emergency order, if the Legislature fails to solve the deficit within 45 days, it cannot adjourn or act on other bills until the crisis is resolved.
Chiang said the warrants can be transferred between individuals, setting up the possibility that a secondary market for the IOUs may develop. Already, ads are appearing on Web sites such as Craigslist offering cash for the IOUs at below face value.
In such a transaction, the person who receives the IOU would get most of the cash they were due from the state, while the person buying the IOU might then hold on to it until maturity and earn the face value plus the 3.75 percent interest.
At least one person offered to buy an IOU at more than face value for a different reason.
“I am interested in purchasing a ‘State of California IOU’ as a souvenir,” an ad posted on Craigslist from Los Angeles read.
Banks vow to accept IOUs -- for a while
Some financial institutions say they will accept IOUs — for a time.
Bank of America Corp., the biggest U.S. bank by assets, said it would accept the IOUs from its customers through July 10. Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. also said they will accept the payment promises, called registered warrants, also through July 10.
“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, head of community banking for Wells Fargo in California, said in a statement.
Other banks have not decided on whether to accept the warrants. Some credit unions also said they will take IOUs, but it was unclear if payday lending businesses would cash them. At least one financial institution in The City, the San Francisco Federal Credit Union, will accept IOUs, according to the California Credit Union League.
Bank of America said it will try to assist those customers in other ways when it stops accepting IOUs after July 10, perhaps by waiving fees or making other arrangements on payments. Wells Fargo and Chase did not elaborate on plans for IOUs after that date.
Examiner Staff Writer Brent Begin contributed to this report.
