Calif. creditors look to options for IOUs

July 10, 2009 7:06:39 PM PDT
There was a change of heart Friday afternoon from a major bank for anyone holding a state-issued IOU. Friday was the last day the biggest banks were going to cash them, but Citibank has reconsidered.

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The decision from Bank of America, Wells Fargo and JP Morgan Chase affects vendors who do business with the state and taxpayers who received their refunds in IOUs. They have all said that at the close of business Friday, "we're not going to cash them."

"Abandonment" and "anger" are words that come to mind when Kathy Lievre thinks about the banks which will stop accepting the state's IOUs after Friday.

Lievre runs the Tri-City Health Center in Fremont, which services low income patients. The nonprofit gets almost half of its income from state grants and reimbursements for MediCal. They have been paid in IOUs since July 2.

Luckily, the clinic redeems them at Fremont Bank, which continues to honor the so-called "registered warrants."

Bank Vice Chair Mike Wallace says it is simply the right thing to do.

"People with tax refunds, venders who've done a good job for the state, I just think it's unfair to penalize them that way," Wallace said.

But Bank of America, Wells Fargo and JP Morgan Chase will stop accepting IOUs at the end of the day. Bank of the West has changed its mind and decided to accept IOUs from its customers indefinitely.

State Treasurer Bill Lockyer says it will create hardships.

"They are, in some instances, saying with their customers they'll extend lines of credit or other things to help but not cash the state's IOUs," Lockyer said.

In just a little over a week, the state has issued more than $350 million in IOUs.

Lievre says nonprofits like her's run on lean budgets and need the cash flow to survive.

Cutting off IOU's is life or death for those whose banks will not cash them.

"I'm sure their executives are staying up worrying about if they can open services for a week, a month of if they'll eliminate services for the county," Lievre said.

But the state's big credit unions say they will continue accepting the warrants.

San Francisco Fire Credit Union is one of them. CEO Diana Dykstra wishes the state would hurry up and come up with a budget.

"I think they need to fix their system, but not on the backs of the consumer," Dykstra said.

Wells Fargo says, "Banks cannot be the solution to California's budget problems. We were reluctant to accept warrants in the first place and can't accept them indefinitely."

Bank of America says it will not be an enabler of the budget stalemate.

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