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HOME > ABOUT > PRESS > FIRST STATE IOUs TO COVER TAX REFUNDS
Article published - July 1, 2009
Credit: PRESS DEMOCRAT
First state IOUs to cover tax refunds
by Martin Espinoza
Barring a last-minute budget deal between Gov. Arnold Schwargenegger and state lawmakers, the state’s printers at Cannery Business Park in east Sacramento could begin spitting out thousands of IOUs as early as 2 p.m today, a measure seen only once since the Great Depression.
The first batch of IOU’s — 28,742 of them, totaling $53.3 million — mostly will be used to cover personal income tax refunds. State officials said Wednesday they have not yet identified the next IOU recipients.
Meanwhile, Sonoma County officials are assessing their ability to cover a loss of $12 million a month in state reimbursements for programs the county administers for the state, such as mental health and children’s services, public assistance, food stamps and job training. The IOUs, or “registered warrants, would first be covered by the county’s general fund reserves and then through short term borrowing from the county’s $1.9 billion treasury.
“We’re going to use any cash we have available,” said Rod Dole, the county’s auditor-controller.
In July, the state’s 58 counties could be handed $776 million in IOUs, bringing the total budget burden from cuts, deferrals and IOUs to $4.3 billion, according to the California State Association of Counties.
Hallye Jordan, a spokeswoman for state Controller John Chiang, said that printing of the IOUs would begin as soon as the Pooled Money Investment Board sets an interest rate for the notes and approves the requested maturity date of Oct. 1, 2009. On that date, anyone holding an IOU would get paid the amount plus interest.
The IOUs possible could go out today, Jordan said.
The last time the state was forced to issue registered warrants was in 1992, when the Legislature deadlocked over an $11 billion deficit before the beginning of the 1992-93 fiscal year.
Back then, said Dole, banks purchased the IOUs and earned the interest. He said it remains to be seen whether banks are willing to buy warrants this time because of the financial strain on the banking industry.
“They’re not in the same financial condition they were back in 1992,” said Dole. “The assumption we’re making right now is that we will have to hold those registered warrants until the state is able to pay us and we’ll collect the interest on the registered warrants when they are redeemed.”
Craig Van Selow, executive vice president of retail banking at Exchange Bank, said the bank is “carefully considering” whether or not to honor IOUs.”
“There are specific legal, financial, accounting, risk and even operational issues associated with advancing funds to holders of registered warrants,” he said in an e-mail statement.
Van Selow pointed out that IOUs are not checks, and thus not immediately redeemable. He said funds provided to IOU holders would actually be in the form of a loan.
“As we receive more information and clarity from the state and the California Bankers Association, we will announce our policy decision on acceptance/redemption of State of California Registered Warrants,” Van Selow said.
Local community clinics will be getting IOUs next week for certain medical services they provide to patients who have no insurance, said Pedro Toledo, a spokesman for the Redwood Community Health Coalition, a network of clinics and community health centers in Sonoma, Napa, Marin and Yolo counties.
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