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Businesses, Poor Take Hit as California Issues IOUs

India-West, New Report, Sunita Sohrabji Posted: Jul 19, 2009

Editor's Note: The failure of the state's lawmakers to come up with a budget has resulted in small businesses and county social service programs receiving IOUs from the State Controller in lieu of payments, with the IOUs redeemable only in October, reports India-West staff reporter Sunita Sohrabji.

SAN LEANDRO, Calif. -- Small businesses contracting with California, students, county social service programs, and welfare-to-work program members braced for a blow last week as the state began issuing IOUs in lieu of payments.

State Controller John Chiang July 2 began issuing more than $3.4 billion in IOUs, after the California State Legislature failed to come up with a budget that would address the states $26 billion deficit. The vouchers officially known as reserve warrants can be redeemed Oct. 2, on which the state will pay 3.75 percent annual interest.

Several statewide banks stopped cashing the IOUs July 10. Credit unions and check cashing facilities are expected to continue cashing the vouchers.

The state is legally required to pay cash to schools, bond holders, state employees, retirees and businesses that provide MediCal or in-home services.

An entire infrastructure is about to collapse, Boona Cheema, executive director of the Berkeley, Calif.-based Building Opportunities for Self Sufficiency, told India-West.

Businesses and organizations uncertain about their financial picture are necessarily going to have to cut their staff and programs, said Cheema. Theres no security anymore.

BOSS works with the homeless, poor and disabled towards financial self-sufficiency. Cheema said many of her clients will be hit hard by the IOUs, which are not redeemable for four months. She likened the situation to an employer withholding paychecks for a lengthy period.

It is a very critical time for the entire state. These IOUs hit everyone from the poorest child to the police force, said Cheema, who is celebrating her 30th anniversary with BOSS this month.

Inderjit Singh Kallirai, who is running for a seat on the board of the California Public Employees Retirement System (see separate story), asserted that the state was sinking itself into a deeper financial crisis by issuing IOUs.

The IOUs incur an automatic interest charge, he told India-West, adding that the banks who cash the IOUs for vendors and others essentially get an interest-accruing loan.

This is not the way anyone should be paying their bills, let alone the state, said Kallirai. It is political maneuvering at the expense of the states citizens and nothing else, he said, noting that the state legislature continues its habits of lavish wining and dining while the caterers bills are paid with an IOU.

Shavila Singh, president of the Newark, Calif.-based Zero Waste Solutions, predicted she may have to lay off 20 to 30 workers if her bank does not give her a loan against the states IOUs.

We have options to pursue, but everything is so unclear. I dont know how much well be able to cover, Singh told the Associated Press.

Dattesh Patel, CEO of the Pasanna Consulting Group, subcontracts IT support to CALPERS, and has seen a drastic reduction in his volume of business with the state. Since the beginning of the year, Patel has had to reduce his hours to a four-day work week, effectively cutting his salary back by 30 percent.

Ive never seen it this bad, Patel told India-West, adding that he has subcontracted with the state for the past eight years.

The father of a new five-week-old baby girl, Shreya, said he hasnt had to take any extreme financial measures yet, but anticipates having to do so if he cant make up his lost state projects with federal or commercial business.

Shikha Chatterjee, vice president of operations at Advanced Software Dynamics, has also seen a drastic drop in the number of contracts her company receives from the state.

Weve put in lots of bids, but everyone is saying that everything is on hold right now, Chatterjee told India-West.

ASD, headquartered in Walnut Creek, Calif., and founded in 1992 by Chatterjees husband Manu, did about 15 percent of its work with the state in previous years, but has now dropped down to less than five percent.

The company is currently working on an IT upgrade project for the Department of Motor Vehicles, said Chatterjee, adding that she was uncertain whether two outstanding invoices for $70,000 would be paid in cash or IOUs.

Overall, the firm which also provides a proprietary software to oil and gas companies has seen a 40 percent reduction in the volume of business since the beginning of the year, said Chatterjee, noting, however, that the firms 75 employees would remain in place nevertheless.

For Ravi Verma, CEO of the Rocklin, Calif.-based Telecommand, the future is less bleak. Verma, whose company provides database support services to several state agencies, told India-Westhis cash reserves would see him through to the end of the year.

Telecommand does almost $2 million a year in business with the state. The company, founded in 1999, has 12 employees and an Indian subsidiary.

The state is safer to do business with than the private sector, said Verma, ruefully recalling the bleak months following the dot.com bust in 2001, when several of his customers simply closed up shop without paying their bills. About 80 percent of Vermas contracts are with the state.

In related news, investors from throughout the country are offering to buy up the IOUs, offering 85 percent of the stated value of the note. Both Craigslist and eBay list several offers to buy the notes, and the state treasurers office has said it plans to establish ground rules for redeeming third-party IOUs.

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