Bank, Business Reluctance Sinks Mayor’s IOU-for-Cash Proposal

Mayor Maureen O’Connor’s innovative plan to support state employees facing a personal budget crisis by engineering the swap of their state-issued IOUs for cash appeared to fall apart Thursday, the mayor’s chief of staff said.

The decision to pull back from the plan was made after a meeting Thursday involving officials from the city, business and banks, said Ben Dillingham, the chief of staff. If, however, the state budget deadlock keeps going--it’s in its 59th day--officials may take another look at reviving it, he said.

“On looking at it in the cold light of day, what we thought was a necessity doesn’t turn out to be,” Dillingham said. “There don’t seem to be a lot of people out there standing in line looking to cash their (IOUs). But that may change, if the crisis were to continue.”

The plan, which would have been the first of its kind in California, would have enabled San Diego residents to trade their state-issued IOUs for cash supplied by local businesses. In turn, the businesses could use the IOUs to pay their quarterly state sales taxes.

Businesses might have been able to earn 5% interest on the IOUs, an added incentive.

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

O’Connor dreamed up the plan after reading a newspaper report saying the state Board of Equalization would accept warrants for the payment of the quarterly sales taxes. She could not be reached Thursday for comment.

Meeting in special session last Friday, the City Council unanimously endorsed the proposal.

The plan called for the city to spend no taxpayer money. Its role would have been 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 last week as possible participants in the plan.

But, Dillingham said, the Price Co. indicated at the meeting Thursday that it would prefer to accept only large-denomination IOUs that, unlike small-denomination warrants, can be verified immediately against fraud by state officials.

The Hotel Motel Assn., Dillingham said, apparently does not have the cash flow to buy back warrants while maintaining its routine operations.

Executives at the Price Co. and the Hotel Motel Assn. could not be reached Thursday for comment.

San Diego Trust & Savings Bank, which had volunteered to handle exchanges at all branches, told city officials Thursday that its insurance carriers had balked at covering fraudulent warrants, Dillingham said.

“Here they’d be providing this service without any income to them and at the same time they’d be absorbing all the risk,” Dillingham said. That risk proved unacceptable, he said.

With all those roadblocks, Dillingham said, the decision was made “to look at some other way of making this go.”

In recent days, an increasing number of banks have announced they will no longer accept the warrants. Dillingham said city officials remain ready to provide state workers with information about where they can still cash their IOUs.

“We’ll have to look at it (today) and decide what else, if anything, to do,” he said.