California IOUs look like regular checks, except they are not redeemable until October 2nd. With the state bank account very low on cash, it can only issue what's legally called a "registered warrant" to pay $3.3 billion worth of July bills. College students who receive Cal Grants and assistance checks for those who rely on social programs will be getting the IOUs.
"We're very concerned about the vendors, the aged, the blind and the disabled who will be receiving these IOUs and don't have access to financial institutions who are willing to redeem the IOUs," says Democratic California State Controller John Chiang.
People doing business with the state won't get paid either. Staff USA provides medical personal for state programs used by the developmentally disabled. The company already has had to cut expenses in anticipation of getting IOUs instead of cash.
"I've had to lay off my staff employees, my administrative staff in order to try to continue to operate my business," says Gloria Freeman, a state vendor.
In a two-to-one vote, a state investment board set the interest rate at 3.75 percent; so a$1,000 IOU would earn $9 in interest when it matures in October.
There is a caveat. The IOUs are only cashable if the state has the money. If it doesn't, the redeemable date can always be extended. But the IOUs aren't just a sign of California's cash problems; they also symbolize the state leaders' failure to fix the budget mess on time. IOUs have only been issued twice in the state's history and no one is taking responsibility for this fiasco.
"I don't believe we let it happen," says St. Sen. Darrell Steinberg, D-Sacramento.
"It's a sad story that they have known for months now that the deadline is June 30th," says Gov. Arnold Schwarzenegger, R-Calif.
Only a budget fix can stop the IOUs, some lawmakers will work through the holiday weekend to try to craft a solution.
At least three major banks have all agreed, somewhat reluctantly, to accept California's IOUs until July 10th. Chase Bank said it was making the move to help its customers. Wells Fargo says its disappointed California has taken the "unfortunate" step. Bank of America decided on Wednesday to accept the IOUs.
The governor and state officials have asked other banks to do the same.