California to issue over $3 billion in IOUs as budget crisis deepens

By Sheri Kasprzak

New York, July 2 - The State of California announced Thursday that it will be issuing more than $3 billion in IOUs to taxpayers, vendors, local governments and others, according to a statement from the state treasurer's office.

"The state will pay 3.75% annual interest when it redeems the IOUs," said Tom Dresslar, spokesman for the treasurer Bill Lockyer's office Thursday.

"The State Pooled Money Investment Board - chaired by state treasurer Bill Lockyer - set the interest rate today [Thursday]. The state will redeem the IOUs no later than Oct. 2, 2009 ... But under emergency legislation signed into law Wednesday by the governor, the IOUs can be redeemed before Oct. 2, if the state determines it has sufficient cash. If the IOUs are redeemed early, the state will pay the interest accrued up to that time, instead of the full interest rate that would be due Oct. 2."

Dresslar said some banks may accept the IOUs from recipients before they are eligible for redemption. Assuming a bank accepts an IOU before it is eligible for redemption, the bank, not the recipient, will receive the interest when the bank presents the IOUs for redemption to the treasurer's office. If the bank does not accept the IOUs before they are eligible for redemption or if the recipient decides to collect interest rather than their bank, the recipient can hold the IOU, present it directly to the treasurer's office for redemption and receive the interest.

So far, Dresslar said in a statement, that Bank of America and Wells Fargo Brokerage Services have agreed to accept IOUs from their customers before they are eligible to be redeemed. The banks said they would accept IOUs from customers through July 10.

As previously reported, California governor Arnold Schwarzenegger declared an economic state of emergency Tuesday to force the legislature to resolve the $26.3 billion budget crisis.

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