Some notes on California's IOUs

| Comments (1) | Misc
You may have heard that California has started paying some of its bills by issuing IOUs, which are sort of weak-looking bonds which pay 3.75% annual interest:
A registered warrant is a "promise to pay," or an IOU, that is issued by the State when there are not enough funds to pay all of its General Fund obligations. Registered warrants bear interest and are redeemable by the State Treasury only when the General Fund has sufficient money. If the Legislature and Governor fail to enact budgetary solutions that provide enough cash for the State to pay all of its bills by July 2, the Controller will begin issuing registered warrants. Assuming there is adequate cash in the Treasury, those warrants may be redeemed on October 2, 2009. Both the issue and the maturity date will be printed on the warrant. If the Pooled Money Investment Board (PMIB) determines there is sufficient cash available for redemption at an earlier date, the warrants may be redeemed earlier than October 2, 2009.

Now, ordinarily, if you had an instrument like this (say, a t-bill), it would be at least semi-negotiable and you'd have a chance at selling it to someone else; and since the state will be paying over face value you'd have some shot at not taking too big a hit. Unfortunately, as California looks like it's well on its way to involvency, with a bond rating of A, and potentially going down to B, [*], I suspect you'd need to accept a real discount, even if there were a secondary market for these instruments, which, as far as I'm aware, there isn't. And of course there's no fixed maturity date: California can pay them off early or late, depending on the state of its finances, so that makes them harder to price.

The good news is that if you have an account at BofA or Wells Fargo, they will cash these IOUs for you. Even then, it appears that you may be subject to fees if California fails to pay up. [*]. On the other hand, if you don't have such an account you're pretty much SOL. Of course, California might regard this as a virtue: if people have to hold these IOUs for months at a time, a certain percentage of them will get lost, which means California gets to keep the money a while longer, if not indefinitely.


heh, "involvency"

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