Fallout: The Financial Crisis

IOUs may hurt California vendors

Sarah Gardner Jul 1, 2009
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Fallout: The Financial Crisis

IOUs may hurt California vendors

Sarah Gardner Jul 1, 2009
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TEXT OF STORY

Tess Vigeland: California Governor Arnold Schwarzenegger declared a fiscal emergency today. Last night politicians in Sacramento failed to resolve a $24 billion budget deficit. As we mentioned yesterday, that means the government will start paying out billions of dollars it owes to state vendors in IOUs. As Sarah Gardner reports, the lack of cash could put hundreds of small businesses in jeopardy.


SARAH GARDNER: John Riley says the state of California owes his company more than $450,000 for computer security services. The co-owner of Sacramento Technology Group is bracing for a big IOU instead of cash. Riley says if their bankers don’t honor that IOU, his company may be forced to stop doing business with California. That’ll hurt. The state accounts for half his company’s sales.

JOHN RILEY: Right now we’re kind of holding our breath.

Riley says his company’s already reduced its workforce from 20 to 13 employees because of the recession. And he doesn’t want to cut anymore jobs.

RILEY: So we’re just hoping that some of our private customers come through with some more projects.

As of this afternoon, only one lender had promised the state it would cash the IOUs. If banks refuse, thousands of the state’s private vendors will be forced to beg for more credit. And in this economic climate, that can be tough.

Mike Murphy runs a day program for developmentally disabled adults in Orange County. He’s counting on the state vendor that contracts with him to get a line of credit to tide itself over.

MIKE MURPHY: If they cannot secure that then we’re probably going to have an extended summer vacation.

In other words, they’d have to close. When asked today if he had a message for vendors like Mike Murphy, State Controller John Chiang addressed elected officials instead.

JOHN CHIANG: The most important point is that the governor and legislature have only a final few moments to resolve this issue.

If they don’t, California will start issuing IOUs tomorrow afternoon, the first time in 17 years.

I’m Sarah Gardner for Marketplace.

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