IOUs spell uncertainty for Calif. small businesses

BERKELEY, Calif. -- Business consultant Katrina Kennedy has taken her young son out of preschool and put a family vacation on hold. Dairyman Mike O'Kelly is wondering whether he is going to have to let employees go.

The problem? They rely on contracts with state agencies for much of their business and, cash-strapped California may start sending them IOUs instead of money until the state has enough cash to cover all payments.

"I've dealt with the state for many, many years, and the failure of the state to come up with a budget has always caused problems for July and August," said O'Kelly, owner of Morning Glory Inc. in Susanville, which supplies milk and eggs to prisons. "This particular economic crisis, however, has me more worried than all of the others combined."

The reason for the IOUs is California's $26.3 billion deficit. Lawmakers have not been able to agree on a balanced budget by cutting spending, raising taxes or both.

Without a balanced budget, the state controller's office says the treasury does not have enough cash to meet all its financial obligations. So IOUs were scheduled to go out beginning Thursday to private contractors, state vendors, people getting tax refunds and local governments for social services.

Assistance payments to elderly, blind and disabled people will be disbursed as usual, because the federal government is paying the state's share.

For California's small businesses and social agencies, which are accustomed to a Legislature that rarely meets the June 30 budget deadline, a lean summer is not new. Most say they expect to cope despite delays in getting paid.

Wells Fargo, Bank of America and Chase bank say they will accept IOUs from existing customers through July 10, while other banks haven't decided. Some credit unions also said they'll take IOUs, but it was unclear if payday lending businesses would cash them.

Most small businesses and social agencies are confident the state will come through eventually, and say it's a matter of when — not if — they'll get their money. Still, having the government of the world's eighth-largest economy resort to IOUs creates uncertainty.