Banks Losing Patience as IOUs From State Pile Up

As California heads into its fourth week of paying its bills with IOUs--nearly $860 million worth to date--banks and credit unions say they are losing patience with their role as chief bailer in the leaky ship of state.

So far, despite a steady stream of rumors to the contrary, the major financial institutions continue to honor the so-called “registered warrants.” But as each day passes without a budget agreement in Sacramento, the chorus of complaints grows among bankers that the IOUs are more trouble than they are worth.

Although banks stand to earn 5% interest on the warrants once they are redeemed, industry officials complain that administrative costs, in computer and staff time, make the IOUs less attractive. Besides, bankers say, they could be earning more by using the money for mortgages or other loans.

And, if Gov. Pete Wilson and legislators don’t get cracking soon, bankers warn that their willingness to accept the warrants could wane. Some concede that rejecting the IOUs might be the best way to prod Sacramento toward a budget compromise.

“My feeling is it’s a good possibility that banks won’t cash them into the month of August,” Nancy Badely, a spokeswoman for the California Bankers Assn., a San Francisco-based trade group, said Tuesday. “We are, in fact, maybe keeping a budget from being agreed upon (by continuing to accept them).”

Because financial institutions have for the most part honored the warrants, most individuals and businesses that supply goods and services to the state have yet to feel any real hardship from the budget impasse. They simply take the IOUs to the bank to be cashed.

But that could be changing. A handful of small banks around the state have stopped accepting the registered warrants, saying they are too costly to handle or pose too great a risk.

“We have felt . . . that there could be counterfeits and altered warrants,” said Joan Jones, executive vice president at Tri Counties Bank, a 14-branch institution based in Chico that stopped accepting the warrants Thursday after a vote by its board of directors.

“It was absolutely a business decision; it was not meant to be a political decision,” Jones said. “I am sure we’ve lost a couple of customers.” Tri Counties is offering affected customers the chance to arrange low-cost credit lines.

In Contra Costa County, east of San Francisco, the four-branch Bank of Walnut Creek, which has $100 million in assets, has imposed a per-day, per-customer limit of $10,000 on registered warrants.

“We will review that as we go along to see how much we accumulate,” said Leland E. Wines, senior vice president and chief financial officer. “We don’t want to have a liquidity problem.” At this point, Wines said, the bank has taken in just $100,000 in warrants, an amount that poses no liquidity risk and has yet to create an administrative bottleneck.

Officials of financial institutions statewide are scheduled to meet today with state Treasurer Kathleen Brown to discuss the warrants and budget goings-on--feeble as they might be--in Sacramento.

“I don’t expect them to be very happy campers,” Brown said.

Bankers grouse that Wilson and legislators are starting to resemble a herd of stubborn goats with seemingly no regard for how badly California’s image and financial standing are suffering. The state has so far issued just under 500,000 warrants, the interest on which will cost the state $1 million. Those figures would surge if the state has to pay workers with IOUs at month’s end.

Moody’s Investors Service and Standard & Poor’s, two major credit-rating agencies, both cited the issuance of IOUs as a factor in their recent decisions to reduce their opinions of California bonds.

“It’s somewhere between a frustration and an embarrassment that we’re in this situation,” said Jack Kilhefner, a senior vice president at Wells Fargo Bank in San Francisco.

When the warrants were first issued on July 1, Wells Fargo was the only big bank to indicate that it would accept them through July and would then re-evaluate its policy. Others left their policies open-ended.

Treasurer Brown said banks have generally indicated that they can manage to accept the warrants through July. But, she added, “it’s quite possible the plug could be pulled sooner.”

Banks are wearying of the hassles connected with handling the warrants, Brown said. Her own office computers experienced “meltdown,” she said, when staff members attempted to validate thousands of numbers on warrants for banks worried about duplications and fraud.

Wells Fargo’s Kilhefner said processing warrants takes 45 minutes of computer time each night. In addition, one or two employees also put in an hour or more to examine piles of warrants.

So far, he said, Wells has accepted about $50 million in warrants. The amount doesn’t pose a liquidity problem for the giant bank, but it’s “money that we’re not using to fund something else,” he said.

Kilhefner said the 5% interest “does not cover our total costs. We are not making money on the deal.”

If the banks think they have problems, consider the fate of Mary Lou Cockcroft, sole proprietor of Walrus Sales Co., a San Francisco company that provides groceries to state prisons and hospitals. Payments to Cockcroft are made directly by the state institutions--rather than the controller’s office--which have informed her that they cannot issue checks. So Cockcroft isn’t even getting IOUs.

Cockcroft was able to increase the loan she has with Wells Fargo to tide her over.

“I think the banks are going to get tired of this whole thing,” she said, adding a jab at the state: “It’s a very strange way to do business.”

State Budget Watch

On the state’s 21st day without a budget, here were the key developments in Sacramento: THE PROBLEM

Legislators and Gov. Pete Wilson need to bridge a $10.7-billion gap between anticipated revenues and the amount it would take to continue all programs at their current levels, rebuild a reserve for emergencies and erase last year’s deficit.

Without a budget for the fiscal year that began July 1, the state is out of cash and cannot borrow money to pay its bills. Instead, claims are being paid with IOUs, known as registered warrants.

IOUs

Issued Tuesday: 11,102, valued at $16 million.

Since July 1: 490,032 with a total value of $875 million.

THE LEGISLATURE

Neither the Assembly nor the Senate met. A Senate-Assembly conference committee met briefly and discussed taking as much as $400 million from redevelopment agencies to help balance the budget.

GOV. PETE WILSON

Assembly Speaker Willie Brown (D-San Francisco) met briefly with the governor. Brown, accompanied by two Democratic members of the Assembly, made an unscheduled visit to Wilson’s office and asked the governor to resume meetings with the legislative leadership. Wilson agreed to begin scheduling meetings individually with each of the four legislative leaders. Brown and Wilson may meet again today.

KEY DEVELOPMENTS

Mayers Memorial Hospital District in Fall River Mills, in Northern California, reported that its bank refused to cash a $180,000 IOU that the hospital received from the state as reimbursement for treatment of Medi-Cal patients. The bank, Tri-County Bank of Chico, announced last week that it no longer would accept the registered warrants. A hospital spokeswoman said the facility’s ability to meet its payroll and pay vendors will be jeopardized if it is not soon able to cash the IOU.