City OKs Exchange Plan for State IOUs : Finance: Council measure allows IOUs to be swapped for cash from businesses, which can use the warrants to pay taxes.

Unanimously endorsing what was called a “win-win-win” proposition, the San Diego City Council on Friday approved a plan under which people holding state-issued IOUs can exchange them for cash from businesses, which could then use the warrants to pay state taxes.

Meeting in special session, the council voted, 7 to 0, to approve the plan, which Mayor Maureen O’Connor dreamed up after reading a newspaper report earlier this week about the ongoing state budget crisis. Two council members missed the meeting.

The plan, the first of its kind in California, is due to take effect Aug. 31, the next state payday, but only if there is no state budget by that date. O’Connor said Friday that she hoped it would ease the “silent, quiet pain” of state employees and vendors facing cash-flow woes.

“The benefit here is that we will have people paying their mortgage, buying food at the grocery stores,” O’Connor said. “We keep the money flowing locally.”

The state began issuing the IOUs July 1, when its fiscal year began with no budget. It has paid nearly $3 billion in bills with IOUs since then.

In recent days, an increasing number of banks have announced they would no longer accept the notes, formally called registered warrants. That threatens to leave state employees, and vendors with extensive state contracts, stuck for cash.

After reading a report this week in the Wall Street Journal that said the state Board of Equalization would accept warrants for the quarterly payment of sales taxes, O’Connor came up with the exchange plan: San Diego residents could trade the state-issued IOUs for cash supplied by businesses. In turn, the businesses could use the IOUs to pay their taxes.

Under the plan, the city would spend no taxpayer money. Its role would be as middleman, setting up sites for residents to sell their notes to businesses.

The Price Co. and the San Diego Hotel Motel Assn. were identified Friday as possible business participants in the plan. Several grocery stores, which handle millions of dollars each day and generate an enormous tax load, also have expressed interest, city and state officials said Friday.

“It’s a win-win-win,” Deputy City Manager Bruce Herring declared in an interview Friday before the vote, saying the plan promised to benefit not only state employees and vendors but businesses, which could earn 5% interest on the IOUs.

“It is a real innovative idea,” Herring said, “especially for people who need money, because they can get that money. Right now,” he said, referring to the warrants, “that money is paper hanging on someone’s refrigerator door.”

Council members also took turns praising O’Connor before voting unanimously for the plan. “I think it is a great idea,” Tom Behr said. “I just want to thank you, mayor, for your ‘heads up’ on this,” Judy McCarty said. “Keep on exploring and having more creativity,” Abbe Wolfsheimer said.

Council members Valerie Stallings and Bob Filner could not attend the meeting, which was called during the panel’s summer recess. Behr and John Hartley showed up in shirt-sleeves. All of eight people--three of them news reporters--sat in the gallery to watch the proceedings.

The mechanics of the plan remain to be finalized. San Diego Trust & Savings Bank has offered to handle exchanges at all branches, Herring said. The city also is exploring exchange sites at Golden Hall downtown and at San Diego Jack Murphy Stadium, he said.

Roadblocks remain, however.

Currently, the state Board of Equalization pays the 5% interest only on notes that are held until the state calls them due, Ernest Dronenburg, a member of the board, said Friday. IOUs cashed in early do not qualify for interest, he said.

It remains uncertain whether the 5% interest provision is wiped out if a business uses a note it has bought to pay taxes. Conceivably, the tax-paying could be seen as cashing the IOU before the state has called back all its notes.

Because that interpretation might make businesses reluctant to buy the IOUs, the City Council instructed the city attorney’s office to investigate the issue, and, if necessary, to take court action seeking an interest guarantee.

“Our concern is to make sure that if (businesses) use the IOUs now to pay their taxes, they will get the 5% interest,” said Paul Downey, the mayor’s spokesman. “And we’re getting mixed messages on that from the state.”

Other potential sticking points include the city’s concern that it not be held legally liable for any mistakes in the process, Herring said. It is unclear whether the city must purchase insurance to run the program, he said.