LOS ANGELES -- Bank of America said last week that on Aug. 5 it will stop accepting the registered warrants, or IOUs, that California has been issuing to state workers during its current budget squeeze.
The action by the BankAmerica Corp. subsidiary, which underwrites many California state financings, could heighten pressure on state leaders to end their impasse over a fiscal 1993 budget, which was due July 1.
Other California commercial banks could further heighten that pressure by following Bank of America's lead. Wells Fargo & Co. and Union Bank of San Francisco, a Bank of Tokyo affiliate that is the state's fifth-largest, also said they would not take warrants dated after July 31. The IOUs must be presented at bank offices by Aug. 10.
The registered warrants are promissory notes with no specific maturity that are being issued to state employees and others instead of checks. Some political observers believe that state leaders have not incurred that constituents' wrath over the budget problem because no one is yet suffering from being unable to cash the IOUs.
Bank of America's action came after recent warnings by bankers that they could not keep cashing the IOUs indefinitely while the state fails to show tangible progress on a budget.
"California banks have gone out of their way to bail out the state," said Gray Davis, the state comptroller. "Now, the biggest bank in the state is saying, |Enough is enough.'"
Bank of America's announcement has no bearing on the state's $475 million of tax-exempt revenue-anticipation warrants sold in June. Mr. Davis has said the state's cash flow would enable California to redeem the warrants when due.
|Drain on Bank Resources'
Kathleen Brown, the state treasurer, said in a statement that Bank of America's decision was not entirely unexpected.
"The [registered] warrants are putting a drain on bank resources," Ms. Brown said, "and customers are beginning to question whether the institutions themselves are becoming part of the problem by continuing to accept warrants."
If banks quit honoring the registered warrants, employees and other creditors who get the IOUs could not negotiate the instruments until the state has funds to redeem them.
Meanwhile, questions also are arising over whether interest on the registered warrants, which is set at 5%, will be treated as tax-exempt or taxable.
"We are studying that intensely right now," after getting inquiries from the state and a number of large banks, said Dean Criddle, a partner of Orrick, Herrington & Sutcliffe. As part of that review, tax lawyers and state officials are exploring the matter with the Internal Revenue Service.
Richard M. Rosenberg, Bank of America's chairman and chief executive officer, expressed concern last week that banks are helping to prolong the state budget impasse by cashing the IOUs.
"In attempting to help ease the hardships their customers must deal with in this circumstance, the banks are inadvertently making it easier for the emergency to drag on," he said.