California Issuing State Warrants to Pay Bills

July 2, 2009

Without a state budget and about out of cash anyway, California Controller John Chiang began issuing the first state IOUs to pay state bills. Here are items from a helpful FAQ on these new California bucks (an unrelated collectible currency is pictured at right):

1. What is a registered warrant?

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 1, 2009. Both the issue and the maturity date will be printed on the warrant.

3. Why is the State issuing registered warrants?

Without action by the Governor and Legislature to stave off a severe cash deficit of almost $3 billion at the end of July, and more than $3.5 billion in August, the Controller will be forced to issue individual registered warrants, also called IOUs, for many payments.

7. What happens if my financial institution will not accept the registered warrant?

You may decide to open an account at another financial institution that will accept registered warrants, or you will have to hold the warrant until it matures on October 1, 2009.

14. How much interest will the State pay?

The State’s Pooled Money Investment Board will set the interest rate for registered warrants at an emergency meeting on July 2. The State will pay that interest from the time the warrant is issued until it matures on October 1, 2009. As soon as the rate is set, this Web site will be updated with more information.

That meeting, by the way, set an interest rate of 3.75%. I wonder how much of a discount people will demand to take California dollars instead of U.S. dollars?


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