The city treasurer’s office wants to take action on California’s budget crisis by buying $10 million in IOUs that were distributed to local residents and businesses by the state government. The phone calls are already pouring in: City Treasurer Russell Fehr on Monday said he received requests from local businesses and non-profits for the city to buy $2.5 million in IOUs.

Fehr, who is presenting his proposal to the City Council Tuesday, told The Sacramento Press that the plan aims to help residents and businesses that may be facing financial problems because the state paid them with IOUs that cannot be redeemed for months. And, the city might be able to make a little money from the proposed program, he said.

“We think it’s a win-win,” Fehr said. “It’s putting local money to use locally.”

The state has set an Oct. 2 date for redeeming its IOUs, known formally as “registered warrants.” In the city treasurer’s view, that’s too long. “If residents and businesses cannot afford to hold the warrants [IOUs] until the Oct. 2, 2009 redemption date and their local financial institution will not accept the warrants, a financial hardship is created that has rippling effects throughout our community,” according to a report from the treasurer’s office.

Fehr acknowledged that the city would be taking a risk if the state government declares bankruptcy. He said he doesn’t think that outcome is likely.

The 3.75 percent annual interest rate on the IOUs is attractive to the city. “Investment of state warrants provides direct financial benefit to the city through higher interest earnings and indirect benefit by providing cash flow options to our residents and businesses,” the report notes.

The city would be able to cover the program’s costs by charging a transaction fee of up to $2 for each IOU, Fehr said.

Kathleen Haley is a staff reporter for The Sacramento Press.