California IOUs: Will Small Businesses Get Stiffed for Millions? - Free Enterprise
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California IOUs: Will Small Businesses Get Stiffed for Millions?

Today, California is set to start issuing IOUs for bills it can't pay. With Governor Schwarzenegger and the legislature at an impasse, the state is preparing to issue IOUs to cover billions of dollars it owes small businesses, large vendors, county agencies and California taxpayers.

According to CNN Money, unless a last minute agreement is reached on the budget, the state will begin issuing IOUs to cover approximately $3 billion in budget shortfall. California Controller John Chiang stated that the delayed payments would include:

  • $424 million for state operations (mostly to vendors)
  • $141 million in payments due to small businesses;
  • almost $200 million in personal income and corporate tax refunds;
  • $363 million due to regional centers providing services to people with developmental disabilities; and
  • $495 for the CalWorks welfare program wouldn't get million right away.

Needless to say, not getting paid represents an added burden to small businesses already fighting to survive tough times. Businesses who contract primarily with state agencies will be hardest hit.

So, how will these IOUs work?

As reported by the San Francisco Chronicle, the IOUs are to be repaid on October 1, 2009. They should earn tax free interest, at a rate that has not yet been set.

The IOUs can be used to pay personal or business income tax, but cannot be used to pay sales tax (though this policy is under review, perhaps in part because of this small business owner's fight against the IOUs when the state last issued them in 1992).

What can you do? The first step to take if your business starts receiving IOUs from the state is to see whether your bank is accepting the IOUs. With California's precarious situation (worst credit rating in the country with more downgrades possible), many banks have been waiting to decide whether they would accept state IOUs issued to customers. Now, at least Bank of America, and Virginia-based Mechanics Bank have agreed to accept the IOUs issued to their customers. As of yesterday, Wells Fargo and Chase, as well as many other banks had not yet decided.