After failing to plug a $26 billion budget gap, California has begun sending out IOUs to cover its costs, but most banks are refusing to accept them. Spencer Michels reports on the ongoing financial crisis in the Golden State.
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Next tonight, bills are coming due in California and the state is having trouble paying them. NewsHour correspondent Spencer Michels has that report.
State-issued IOUs are starting to show up in California mailboxes, and the recipients are having a hard time cashing them.
The state has been printing the IOUs since July 2. Ever since, people expecting an income-tax refund check have been annoyed and businesses and social service agencies have been disrupted and confused.
The state intends to issue a total of $3 billion in IOUs. They were needed because weary legislators working long into the night failed to approve a budget, leaving the state $26 billion in the hole and without cash. The IOUs pay 3.75 percent interest, and the state promises to honor them in October, if the budget allows. If not, the state could extend the redemption date.
The problem now is that most of the big banks stopped accepting the IOUs last Friday after cashing a few of them for three days. So vendors to whom the state owes money — companies that supply the state's prison system, for example, as well as lawyers and service recipients — can't cash the warrants.
The banks worry about the financial risks the state is asking them to assume, says Rodney Brown, president of the California Bankers Association.
RODNEY BROWN, president, California Bankers Association: The banks don't really appreciate being put in this place where they are asked to basically become the bank to the people that the state owes money to; 3.75 percent is not really sufficient reward in the way of interest to compensate a bank for the risk.
The state's finance panel set the interest rate. It's the first time since 1992 that IOUs have been issued. State Controller John Chiang said he had no choice but to use them.
JOHN CHIANG, California Controller:
This impacts county governments who are providing social service programs. It's going to impact the ability of childcare providers, the people who assist the disabled.