California's creditors look to options for IOUs

SACRAMENTO, Calif. — Thousands of vendors who do billions of dollars of business with the state of California are scrambling as major banks say they will no longer honor the state's IOUs.

Despite pressure from the state treasurer, JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. and other major banks planned to stick to their plans and not honor California's warrants after Friday.

The bankers are trying to pressure legislators into closing the state's $26.3 billion budget shortfall, though there have been few signs of progress.

Some businesses say they may find it difficult to survive or hold onto their employees if they can't find a way to redeem their IOUs quickly.

Until there is a budget agreement, many state contractors including an industrial supply warehouse south of Sacramento and group homes for the developmentally disabled in San Diego are hoping bank loans will see them through.

Gloria Freeman isn't counting on her bank, giant Bank of America, and is approaching other lenders.

Freeman is president of Staff USA Inc., a Rocklin-based temporary-employment agency that has provided medical professionals to state prisons, rehabilitation and mental health departments for 30 years. She said 80 percent of her business comes from the state.

She laid off five of her 55 employees June 26, when she heard the state was planning to send her hundreds of thousands of dollars worth of IOUs that she can't cash.

"Every time they have a budget impasse, they don't pay the vendors for six or seven months," Freeman said. "I'm trying to do everything I can do just to get through it."

Freeman plans to sell her IOUs through a second business she owns, Auction Ten. The notes have a 3.75 percent interest rate and can be redeemed Oct. 2.

"There were a surprising number of people interested in buying the IOUs. Probably a dozen or so, talking from 10 cents to like 90 cents on the dollar," she said. "The banks were saying they weren't going to take them. Now it turns out there are other people who are interested in taking them."

Produce distributor Christian Bartels of Ceres has built a 10-year relationship with Bank of Stockton. He's counting on the regional lender to honor the IOUs or give him a loan to see him through the state's cash shortage.

"If it was a perfect storm and they just cut me off, then I wouldn't last very long," said Bartels. "I've been in talking with them fairly frequently and they've got my back so far. If I was with one of the big banks I'd be scared right now."