SACRAMENTO — Not since the Great Depression has California been forced to issue IOUs in place of checks to pay what it owes to government workers, county welfare agencies, doctors and hospitals, and others who provide government with needed products and services.
But the state will have little choice but to do just that Wednesday unless Gov. Pete Wilson and the Legislature are able to reach agreement on handling a record $10.7-billion shortfall by adopting a budget for the new fiscal year that begins July 1.
Called registered warrants, these IOUs look like state checks. And because banks are expected to cash them for regular customers, they may even act like state checks. And yet they won't be checks at all, but interest-bearing IOUs.
In just the first two days of July, the state could issue as much as $182 million in these warrants, to be used to pay individual and corporate tax refunds, bills for Medi-Cal patients, utility bills and rent.
The warrants would pay interest at an annual rate of 5% to those who hold onto them until the state can redeem them. A month's worth of the IOUs could cost the state $10 million in interest.
Unless there is a budget agreement, the number of IOUs would accelerate day by day until over 800,000 of them would have been issued by July 31, when most state employees are due to be paid.
Although there could be inconvenience for individuals and businesses that receive them, the primary impact of the IOUs will be on the state itself. They are a public sign of the depth of the state's financial woes and the difficulty that the governor and the Legislature have in resolving the trouble.
State Controller Gray Davis, who often clashes with the Republican Administration, said he knows of no other state in the country that is considering replacing checks with IOUs to pay its bills.
"The real problem comes from the perception that California can't get its act together," said Davis, who has announced that his office will begin printing the first of the registered warrants today.
IOUs will be "an absolute embarrassment" to the state, Davis said. "We pay for that scenario because some reduction in California's credit rating is almost certainly going to occur."
State Treasurer Kathleen Brown, another Democrat, said that some individuals--those who do not have regular accounts with banks, S&Ls or credit unions--could have difficulty cashing the warrants. "I have grave concerns about those at the bottom of the economic totem pole," she said.
