The State Worker

California set to pay $2.7 million to state contractors over recession IOUs

A group of business owners who received IOUs instead of checks from the state of California during the recession could be paid $2.7 million a decade later.

Gov. Gavin Newsom’s budget proposal for the coming year requests the money to close out a class action lawsuit filed in 2010 by Nancy Baird, a San Luis Obispo County woman who owned a small embroidery business. The $2.7 million payment is outlined in a letter from Newsom’s Finance Department to legislative leaders.

The lawsuit stems from a $27,000 contract Baird received to provide shirts and uniforms for a California National Guard youth camp around April 2009. Baird provided them in May and June of that year.

Then the state issued her a registered warrant, or IOU, instead of a check, telling her she wouldn’t be paid until at least October but that she still owed income taxes on the IOU, according to the suit.

She filed the lawsuit against former State Controller John Chiang, who disbursed more than 200,000 IOUs worth more than $1 billion to businesses, local governments and taxpayers owed refunds amid a budget standoff. Gov. Arnold Schwarzenegger’s administration used the warrants during the Great Recession to try to help balance the state’s books amid plummeting tax revenue.

“It’s just not the right thing to do,” Baird said this week, adding that she no longer operates the embroidering business. “When I was running my business, when I had to pay state taxes and all that other stuff, you pay or you get fined. And then they turn around and they say, ‘we’ll just send them a warrant.’ I wouldn’t say it drove me out of business, but it sure didn’t help.”

California’s Prompt Payment Act requires that businesses, and the state, pay a .25 percent daily penalty on late payments to their contractors. Baird and other plaintiffs did not receive that additional compensation when the state paid them. They sued to obtain the late payments and to stop the state from issuing IOUs.

A Sacramento County Superior Court judge ruled in 2016 that Baird and other plaintiffs who were issued IOUs before July 28, 2009 are owed late payment penalties. After that, the state amended the law to count registered warrants as payment. Plaintiffs in the suit who received IOUs after the change aren’t owed money, the judge ruled.

State law still allows the government to use the warrants when the general fund is depleted.