State rolls out $3.36 billion in IOUs today

California plans to begin issuing billions of dollars in IOUs today to scores of creditors, including private businesses and county governments.

The move will not affect many individuals who receive government assistance. Low-income people, the elderly and the disabled will receive their regular checks on schedule. Schools, state workers, Medi-Cal providers, pension funds and In-Home Supportive Services are all protected by law from receiving an IOU in lieu of a real check.

But thousands of vendors who provide goods and services to the state will be given IOUs instead of cash. From a company that sells french fries for prisoners to a firm that pumps out latrines in state parks, many businesses are trying to save cash and hoping their banks will accept the IOUs.

Meanwhile, the University of California has not yet decided whether it will front the money for educational Cal Grants, another program that will get IOUs.

State Controller John Chiang expects to disburse $3.36 billion in IOUs and $10.9 billion in regular payments this month.

After officials decide this morning how much interest they'll pay on the IOUs and when they can be redeemed, the controller's printing presses will churn out the first batch of IOUs for 28,742 state tax refunds totaling $53.3 million, said Garin Casaleggio, a spokesman for the controller.

The IOUs probably won't be cashed by the state for 90 days - and then only if the treasury has the money to cover them.
Business impact

Bank of America said it will accept IOUs from existing customers until July 10, with no dollar limits. Wells Fargo and Bank of the West have not yet decided whether to accept them. About 19 California credit unions will accept the IOUs, including Chabot in Dublin, Contra Costa in Martinez, SRI in Menlo Park, Provident in Redwood City, San Francisco in San Francisco and Kaiperm Diablo in Walnut Creek.

Many companies said they will simply tighten their belt and wait to redeem their IOUs.

Ken Jackson, owner of Vallejo's Ktek Products and Systems, sells office supplies, computer accessories and janitorial supplies to the state.

"The key is to have cash flow to weather the storm," he said. "My cash flow is about 60 days out. If it goes beyond that, I'm in trouble."

American Transit Supply in Hayward does about three quarters of its business with the state, providing air filters, oil filters and hydraulic filters for state vehicles such as CHP cars and fire service trucks.

"We figure we've got about $50,000 to $70,000 in accounts receivable with California," said Brian Beery, vice president. His firm has stockpiled cash to make it through and will temporarily transfer its 10 employees to a sister firm.

Thompson's PortaSeptic Services in Fort Bragg, a self-described "mom and pop shop," expects to receive IOUs for pumping out septic tanks in Mendocino County state parks, said owner Melissa Berman.

"It would be a hardship," she said. "We can handle it but we will have to scramble to cover all of our standard expenses. But a couple of months (of IOUs) would not put us in jeopardy."

At French Fry Xpress in Milpitas, owner Art McCoy said he expects to get IOUs for his french fry deliveries to state prisons.

"It's just two of us, my son and myself, so we don't have any payroll," he said. "We'll just have to wait until the budget is settled."
Other costs

Some of the IOUs' impact will not trickle down to Californians because of backfilling from the federal government, counties and colleges.

For instance, cash assistance for aged, blind and disabled people will be paid in full by the federal Social Security Administration during July and August. As part of a February agreement, counties already plan to cover CalWorks temporary assistance in July and August.

The controller will issue IOUs to the California Student Aid Commission, which administers Cal Grants, the state-funded financial aid that helps about 143,000 students attend college. Grants top out at $7,788 for a state college and $9,708 for a private one.

"If I'm not able to get it, I might have to take a leave of absence from school to work and pay for tuition," said UC Santa Cruz senior Tommy Le, who works two jobs on campus and helps support his family. "Our state is divesting from students. It's heartbreaking."

In the past when state budgets have been late, UC and CSU have advanced the grant money to students, interest-free.

UC spokesman Ricardo Vazquez said the university has not yet decided whether it will do so this year. CSU students "will definitely be covered," said spokeswoman Claudia Keith.
Bay Bridge project OK

Some state contractors have their own revenue sources.

Bart Ney, Caltrans spokesman for the Bay Bridge project, said that financing for the bridge will go through because it comes mainly from tolls, the result of AB144, approved in 2005.

"It's good for us," Ney said. "We get to keep going."

One firm said it chose not to do business with companies that rely on state payments. San Mateo's Bay View Funding provides short-term financing for companies. One client was a temporary staffing agency that works for the state, which used Bay View to meet its weekly payroll.

"We were uncomfortable with the state and their ability to put a budget in place so we decided to exit any relationships involving California," said Andrew Aquino, senior vice president. "We told our client to find a new source."