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California last issued IOUs in 1992. Doing so again could have serious repercussions. According to Treasurer Bill Lockyer, the decline in the state's credit rating that is likely to follow IOUs -- as it did 17 years ago -- would cost the state $3.4 billion in higher interest rates over 30 years, adjusted for inflation.
Wall Street rating agencies have already warned that they are weighing downgrades to the state's credit, which would probably take years to recover, Lockyer's aides said.
So far, no banks have formally committed to honoring the IOUs, said Chiang's spokeswoman, Hallye Jordan. At least one financial institution, the Golden 1 Credit Union, said Tuesday that it plans to accept the state's IOUs from its 710,000 members, some of whom are state contractors.
The governor and legislators can avert the IOUs if they reach a budget deal before they are issued Thursday. But once they are issued, those who receive them will have to cash them with banks that may accept them or wait until the IOUs come due Oct. 1, Jordan said.
