Insufficient Funds

The jig is up. After three weeks of paying its workers with IOUs because it has been unable to resolve a deadlock over an $8 billion budget deficit, California's state government has been called by its banks. Three of the state's largest -- Bank of America, Wells Fargo and Union Bank -- have curtly informed Sacramento that they will no longer honor the IOUs, nearly $2 billion of which will be outstanding by the end of this week. Bank of America had been handling about 30% of the IOUs since California began issuing them on July 1. Said a spokeswoman for the California Bankers Association: "We have no idea how long we are expected to loan the state of California money."

The IOUs were floated after Republican Governor Pete Wilson could not reach agreement with the Democrat-controlled legislature on how to balance the budget. California had not used such a promissory system widely since the Great Depression. Known as registered warrants, the IOUs are numbered chits resembling checks. Under the state's plan, depositors and their banks were informed which numbered IOUs could be cashed as the state found funds to back them. The state offered to pay banks a 5% fee to process the chits, but banks maintained that the cumbersome process of handling the unusual payments would cost them much more. Still, the banks cashed them freely at first, but they warned depositors that they might stop doing so at any time -- and that time appears to be at hand.