In the News: Blame Games

July 13, 2009, 6:57 pm

Small Business Finance & Profitability

By William Stong

Given California’s financial and budget predicament, the press is full of articles about the crisis, its causes, status, what is happening and, more often, what is not happening.

One particular article has something so incredible that, in my opinion, it warranted an interruption in the current series on Cash Flow. It definitely affects cash flow. A short interruption for “Breaking News…”

The article, “Banks’ plan to refuse state IOUs takes heat,” was on page A9 of the Contra Costa Times on July 9, 2009 (Thursday). The focus of the article was on how and when certain banks were going to handle California State’s IOUs. The main thrust was that since the banks have benefited from government bailouts, if they didn’t participate in California’s IOUs then there would be a backlash.

Let’s set the playing field. Not level it—just make sure we know what game we’re playing and what the rules are.

The State of California has started issuing IOUs. In normal times, California would be issuing checks to pay for its obligations for services rendered and entitlement payments. Since the State has no budget (at least it had no budget for the current fiscal year on the day of the article) and it is running short of cash, it has resorted to issuing IOUs instead of checks. These IOUs are debt instruments, issued by the State and given to those to whom the State owes money. The IOUs are not cashable until October 2009, although they carry an interest rate until then. At least the State recognizes that cutting a check (which can be converted to cash in a couple of days) isn’t the same as issuing a “promise to pay”: hence, the extra interest payment.

Some banks offered to accept the California IOUs for deposit even though the banks will not be able to cash them until October. When this was reported, I was impressed. Members of the private sector stepping to the plate to help out a state government that had gotten itself into a pickle.

However, some of the banks would only be accepting the IOUs for a limited period of time and it’s this time limit that is causing the angst.

Personally, I would have thought the State of California would have been appreciative of any support, even if temporary. Which brings me to the incredible piece I mentioned earlier:

“If they hold to that stance, then there’s potential for hardship being suffered by the recipients of IOUs,” said Tom Dresslar, spokesman in the California Treasurer’s office. Unless recipients are able to hold IOUs until Oct. 2, the official redemption date, “they’ll have to scramble” to feed their families and meet obligations, Dresslar said.”

Did he actually say that with a straight face?

I think the hardship, and the suffering, and the scrambling started with the arrival of an IOU in the mailbox instead of a check. I could be wrong, but who stopped paying their bills on time?

Sorry. There’s only one “person” at fault here: California’s finances.

Bill

William A. Stong

Email: william.a.stong@gmail.com

SBF&P # 29