By Steve Wiegand
Published: Thursday, Jul. 2, 2009 – 12:24 p.m.
State finance officials set a 3.75 percent interest rate and an Oct. 2 redemption date this morning for the IOUs that begin going out this afternoon, while legislators and the governor continue to wrestle with the state’s budget problems.
Wells Fargo, meanwhile, became the second large bank to announce it will accept the IOUs as cash until July 10. Bank of America had announced the same thing on Wednesday. Golden One Credit Union has also said it will take the IOUs, but announced no termination date for doing so.
Just how long the rate and date for the IOUs are in effect, however, may be as uncertain as the outcome of the partisan budget struggle under the Capitol dome. The Schwarzenegger administration said it favored a 1.5 percent interest rate on the IOUs, and a longer date before they had to be redeemed.
The action came at a meeting of the Pooled Money Investment Board, which oversees some state investment and money management issues and consists of the state treasurer’s office, state controller’s office, and governor’s Department of Finance.
Numbers-crunchers for state Controller John Chiang proposed a 3.75 percent rate on the IOUs the state will begin issuing in lieu of paying its bills to vendors, local governments and people and companies waiting on tax refunds.
But Thomas Sheehy, chief deputy finance director for policy, objected, contending that the rate could cost the state more than $100 million in additional interest costs over the next two months if IOUs must be issued throughout that period to cover about $5 billion in bills. Sheehy said 1.5 percent was a more reasonable rate.
He also objected to setting a redemption date of Oct. 2, arguing that a later date would give the state more flexibility, particularly in light of a bill signed into law by Schwarzenegger Wednesday that would allow the state to redeem the IOUs early without having to pay interest through the fixed redemption date.
After Chiang and Deputy Treasurer Francisco Lujano voted for the higher rate and Oct. 2 date, Sheehy said the department would try and reopen the issue next Tuesday at a special meeting of the board.
Sheehy also split with Chiang and Lujano over the borrowing of about $3 billion from state special funds to its general operating fund. Such borrowing is routine, and usually for 90-day periods. The treasurer’s office and controller wanted to make the period for 120 days, while the finance department wanted it only 90 days. In addition, Sheehy asked that $1.2 billion be set aside for use only to pay back state bondholders in the next two months.
Department officials said it was sort of a “belt-and-suspenders” approach to make sure the state would continue its unblemished record of never defaulting on a bond.
Unable to reach agreement, the matter was put off until next week.
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