Legislators in California may have plugged up the budget hole with bubblegum and sealing wax for the time being, but the State Controller's Office, presumably in recognition that the latest budget deal has not solved the state's fiscal woes once and for all, is continuing to issue IOUs. According to a spokeswoman for Controller John Chiang, even though the budget measures intended to resolve the deficit--recently pegged at $26.3 billion--were signed by Gov. Schwarzenegger on July 28, it will take some time to determine just how the budget package will affect the state's cash flows, so in the meantime the IOUs continue to flow.
I can now attest to this personally, as I got my hands on a little piece of history just last week when my 2008 tax refund finally arrived in the form of an IOU, or "registered warrant," as they are formally known. The instrument of the registered warrant was developed as an emergency financial measure during the Great Depression. Since the Great Depression, the only other time the state issued IOUs was during a two-month-long budget impasse in 1992 (see pages 16-17 of this Legislative Analyst's Office report from January 2009 for more on IOUs). The state started issuing IOUs on July 2, and had planned to issue nearly $3 billion worth of them by the end of the month.
In case those of you not privileged enough to receive an IOU from California were curious, here is the text of the letter from the state controller that accompanies the registered warrant:
Due to the State of California's severe cash crisis, your payment is being made with the enclosed registered warrant, also known as an IOU.
A registered warrant is a "promise to pay," with interest, that is issued by the State when there is not enough cash to meet all of the State's payment obligations. Registered warrants are legally negotiable instruments that bear a maturity date of October 2, 2009. IOUs may be redeemed, with interest, by the State Treasurer on or after October 2, 2009. If the Pooled Money Investment Board (PMIB) determines there is sufficient cash available for redemption at an earlier date, they may be redeemed earlier than October 2, 2009. These IOUs are issued in place of regular warrants, or checks. The interest rate, set by the State Pooled Money Investment Board on July 2, 2009, is 3.75% per year.
Some financial institutions may choose to honor IOUs before the maturity date. If your financial institution honors the IOU, you may "cash" the warrant as you would any other check. Contact your financial institution to determine its policy on accepting IOUs.
If your financial institution will not accept the registered warrant, you may hold the IOU until it matures and then be paid the full face value of the warrant, plus interest. To receive interest, warrants should be presented in person or by mail on or after the maturity date of October 2, 2009, to the State Treasurer's Office at 915 Capitol Mall, Sacramento, CA 95814. If the PMIB sets an earlier date for redemption, IOUs may be redeemed with interest on that date.
More information about IOUs is available at the Controller's Web site at www.sco.ca.gov. The Web site will be updated as new information becomes available. You may also call the Controller's Registered Warrants Assistance Line at 1-866-267-4255. I regret the inconvenience this causes and appreciate your understanding as I try to manage the worst cash crisis since the Great Depression.
Oh, and that massive amount of money that the State of California, the world's eighth-largest economy, simply can't afford to reimburse me for? It's $10. My bank, like the other large banks in the state, stopped accepting IOUs on July 10. Guess I'll have to wait until October to collect on it. At least I can get in on that 3.75% annualized interest rate. Then again, maybe I can sell the IOU as a collectible for more than face value.
For related research and commentary, see:
- California's Spending by the Numbers
- Citizens' Budget 2003-05: A 10-Point Plan to Balance the California Budget and Protect Quality-of-Life Priorities (At least as applicable today as it was six years ago!)
- Reason's California-Related Research and Commentary