A federal judge last week ruled that California acted illegally when it paid state employees with IOUs during a lengthy budget impasse last summer.
Judge Garland Burrell Jr. of the U.S. District Court of Sacramento said the state violated the Federal Fair Labor Standards Act, which established minimum wages and overtime pay for employees during the Depression.
Federal regulations implementing the act require that the workers be paid in "cash or its equivalent," Burrell said. "They may not pay these wages in scrip or a similar medium."
California failed to pass a budget until 63 days after fiscal 1993 began July 1. That delay meant the state could not borrow to cover a cash crunch, nor could it issue checks except for certain constitutional purposes.
In response, California had to issue registered warrants, commonly referred to as IOUs, to pay most of its employees and suppliers.
A spokesman for Gov. Pete Wilson said the state may appeal Burrell's ruling on grounds that the registered warrants were negotiable instruments of currency. Burrell wrote that the IOUs were not immediately negotiable in some cases because not all financial institutions accepted them.
The lawsuit, filed on behalf of state workers, might produce penalties against the state. The judge could grant damages up to twice the amount of the IOUs, but an award of that magnitude is highly unlikely.
