Davis Promises to Begin Redeeming State IOUs Aug. 3 : Budget: Controller says he can start retiring $922 million in registered warrants on that date. Bankers voice concern about continuing to accept notes.

Hoping to placate banks upset at the prospect of having to sit indefinitely on a pile of state IOUs, Controller Gray Davis said Wednesday that California has enough money to begin redeeming $922 million in registered warrants Aug. 3.

Without a state budget since July 1, the state has issued more than $1 billion in so-called registered warrants to pay its bills. Meanwhile, tax collections and other funds have continued to roll in, Davis said in a telephone interview, and the state has about $1.5 billion in available cash.

Asked whether state employees might react indignantly to the news that so much cash is available while they are being paid IOUs, Davis said: “I’ve already been sued.” Late last week, a class action suit was filed on behalf of state employees seeking damages and an order requiring the state to pay its workers in cash. The state has 20 days to reply.

The promise of redemption for some of the IOUs between Aug. 3 and Aug. 6 comes as good news to the state’s financial institutions, whose patience with legislators and Gov. Pete Wilson has been wearing thin.

“Every bank will at some point reach a saturation point,” Davis said at a news conference in Sacramento. “The governor and the Legislature should know that time is running out.”

Davis said bankers with whom he had spoken indicated relief at the promise that the state will cash a hefty portion of the warrants that have been issued. Most banks and credit unions are continuing to accept the warrants, but a handful of small banks--including Tri Counties Bank in Chico and the Bank of San Pedro--have declined, saying the warrants carry too much risk.

“I think they (Bank of America, First Interstate, Wells Fargo) feel better knowing there’s some end in sight,” Davis said.

Even so, the state is expecting to continue to pay its debts with warrants even as it pays off earlier warrants with cash. If there is no budget in place, the state will still have $1.6 billion in outstanding IOUs as of Aug. 14, according to projections from the controller’s office.

Separately, state Treasurer Kathleen Brown met Wednesday with bankers, credit union officials and other representatives of the financial community and told reporters afterward that “they definitely expressed grave concern about how long they can continue to accept the warrants.”

Brown said bankers are finding that “customers are turning against them (and asking): ‘Why are you part of this problem? If you would just stop honoring these warrants, these people would do the job they’re supposed to do.’ ”

Gregory O. Wilhelm, director of government relations for the California Bankers Assn., a trade group, said Davis’ action “gives some predictability” to the situation, but he added that he nonetheless expects some banks “to pull the plug” on the warrants before the end of this month.

Davis said he was compelled to redeem the warrants by a 1933 California Supreme Court decision. The payments will not jeopardize “constitutional obligations” such as debt service and money for schools, he said. He repeated earlier pledges not to pay any elected officials, including legislators, until a budget is in place.

The money to redeem the warrants, he said, is coming from motor vehicle license fees and payments withheld from trial courts and the federal government, among other sources.

Brown said the state will have to pay about $3 million in interest on the $922 million in warrants that Davis has offered to redeem from Aug. 3 to Aug. 6.

Warrant holders who fail to redeem the IOUs between those dates will have to wait for the next redemption period set by Davis.

Times staff writer William Trombley contributed to this story.

State Budget Watch

On the state’s 22th day without a budget, these 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 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 cannot borrow money to pay its bills. Instead, claims are being paid with IOUs known as registered warrants.

IOUs: Issued Monday: 14,607, valued at $18 million.

Since July 1: 504,639, with a total value of $892 million.

GOV. PETE WILSON: The governor met separately with Assembly Speaker Willie Brown (D-San Francisco) and Senate Leader David A. Roberti (D-Van Nuys) to discuss ending the state’s post-Proposition 13 bailout of local government.

THE LEGISLATURE: Neither the Assembly nor the Senate met. Members of a Senate-Assembly committee met briefly.

KEY DEVELOPMENTS: At a news conference, Controller Gray Davis said California has enough money to begin redeeming $922 million in registered warrants from Aug. 3 to Aug. 6. Davis said money to honor the IOUs is trickling into state coffers from tax revenues, motor vehicle license fees and other sources, allowing a partial pay-back of the IOUs.