Options dwindle for cashing California IOUs

Thousands of California creditors were left Monday with fewer options for cashing IOUs issued by the state, as several major banks said they no longer will honor them.

U.S. Bancorp became the latest to reject the pay-you-later warrants, joining Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and other large institutions.

The state began issuing IOUs at the beginning of the month as a way to save cash amid a $26.3 billion deficit.

"The decision by most major banks to not accept IOUs makes them less liquid, makes it more difficult to turn them into cash," said Tom Dresslar, spokesman for the state treasurer's office. "It's logical to conclude that the potential for hardship has increased."

Officials said it was too early to tell if businesses that receive the IOUs were feeling a financial squeeze.

The state controller's office issued nearly 130,000 IOUs - formally called registered warrants - for $436 million between July 2 and Friday. The state expects to issue $2.9 billion worth of IOUs through the end of July.

California Bankers Association spokeswoman Beth Mills said major banks had hoped their refusal to accept the notes would push legislators and Gov. Arnold Schwarzenegger to more quickly close the deficit.

"We're still hopeful that something gets done here in the short-term," she said. "Really, what needs to happen is there needs to be a (balanced) budget."

A full weekend of talks between the governor and four legislative leaders led to modest progress but failed to provide a breakthrough. Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo, said the hardest work lies ahead as lawmakers try to decide which agencies and programs will suffer the greatest cuts.

"I think that the IOU issue is another example of why we need a solution as quickly as possible," Schwarzenegger spokesman Aaron McLear said.

No talks were planned Monday as staff members in the Legislature and governor's office worked over the points negotiated over the weekend.

McLear said Schwarzenegger expects to meet with the Democratic and Republican leaders of the Assembly and Senate on Tuesday.

"There's really nothing more for them to discuss until their staff crunches some numbers," McLear said.

The Legislature has until the end of August to balance the budget for the current fiscal year. If it fails to do so, payments to state pension funds and paychecks for government employees will be jeopardized.

Schwarzenegger launched a new Web page on Monday, http://www.StandForCA.com, featuring a television ad his campaign committee said would begin airing statewide Tuesday to tout the governor's position in budget talks.

"I will not sign a budget with higher taxes that cause businesses to leave or more jobs to vanish. And I will not sign a budget that does not address the waste, fraud and abuse in our government," Schwarzenegger says to the camera. "And I will not sign a budget that pushes our financial problems down the road. Because the road stops here."

The extent of the ad buy was not disclosed.

Meanwhile, the largest state employees' union released a letter to Schwarzenegger accusing him of breaking his word.

"You campaigned for governor promising to be 'a different kind of leader,'" Service Employees International Union Local 1000 President Yvonne Walker said in the letter she sent Friday. "Instead you are closing health clinics, shutting DMV offices, dismantling our college and university system, and cutting programs that cost-effectively benefit our most vulnerable seniors and children."

U.S. Bank Senior Vice President Steve Dale would not comment about why his company opted against cashing any more California IOUs. U.S. Bank is California's fourth largest in number of branches and sixth largest in deposits.

Dale said the decision was consistent with a statement issued by the bank July 2. The bank said then it would accept the warrants "for a limited time with the expectation that the state's budget issues are resolved in the near future."

Bank of the West decided late Friday to keep taking the IOUs from customers who were doing business with the bank as of July 2.

More than 80 credit unions have agreed to keep taking the IOUs, said Henry Kertman, vice president of the California Credit Union League.

Fewer banks accepting the IOUs could lead to a secondary market for the warrants. The state will pay 3.75 percent interest and will begin redeeming them Oct. 2.

Last week, the Securities and Exchange Commission defined the IOUs as securities, meaning they must be sold through a licensed agent. The Municipal Securities Rulemaking Board said broker-dealers cannot take advantage of IOU holders' need for cash to buy the notes at steep discounts.

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On the Net:

Read which financial institutions are accepting IOUs: http://www.treasurer.ca.gov/warrants/index.asp