Questions And Answers On California’s IOUs

Q: What are state-issued IOUs? A: They’re promises to pay a certain amount of money plus interest. By issuing IOUs, the state can hold onto cash to pay state workers and cover other debts. The interest rate will be set today as will the maturation date, which will likely be about 90 days from now.

Q: Has this been done before? A: In summer 1992, Gov. Pete Wilson issued about $4 billion in IOUs. However, since then, the federal courts have ruled that it is illegal to issue IOUs to state workers. The Constitution also gives priority to debt holders and schools. Officials must continue to pay into pension plans, in-home supportive services and Medi-Cal providers. Businesses with state contracts and taxpayers awaiting refunds are among the likely recipients of the IOUs.

Earlier this year, the state delayed some payments but did not issue IOUs.

Q: Can you sell or cash an IOU? A: While the state won’t redeem them before the maturity date, they likely will be accepted by some banks and credit unions, which will pocket the interest after maturation. Some large banks have not yet decided whether to accept the IOUs as if they were regular checks.

Q: What if the governor and Legislature agree to a budget solution after the IOUs are sent? A: The state controller decides when to stop issuing IOUs. However, a budget fix doesn’t mean you could cash an IOU early. You’ll still have to wait until the maturation date to redeem the IOU if your bank refuses to cash it before then.

Q: Who should I complain to about this? A: Your elected officials. The governor’s office telephone number is (916) 445-2841.

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