It is already July, and the ludicrous budget plan I wrote about a week ago did not end up passing. Now California is starting to issue IOUs for many of its obligations. These IOUs are actually called “registered warrants”, and they will yield a 3.75% annual interest rate. The state plans to repay them in October. So what happens if you receive one?
Apparently many IOUs would be sent to residents who are still owed a tax refund. Many small businesses that sell to the state will also receive them. A full list of the various agencies and groups that will be paid with IOUs is here. Right now the large banks such as Bank of America, Chase, and Wells Fargo are willing to cash the IOUs for customers. However, this only lasts until July 10th, so this means that if you need the money now you better hope that you receive your IOU before then and get it to the bank.
It is also possible to sell the IOU to other lenders and investors. Afterall, whoever holds the IOU at the time of maturity will collect the interest accrued. There is a risk of default from the state, but I can see some people getting into the business of buying up IOUs from people who need the cash. Most likely these folks will pay less than the value of the IOU since they want to make a profit.
If you do not need the cash right away it might be best just to hold on to the IOU because the interest accrued is not taxable. 3.75% tax free is a lot better than any CDs and bank accounts out there now, but it really means nothing if you need to pay your bills right now.
I hope that the state gets its act together by July 10th because otherwise many people may have to resort to less safe venues to cashing their IOUs. Small businesses may not even be able to survive without the ability to keep the lights on and making payroll. Needless to say, this is a complete debacle, and I hope it does not cause too much damage. Additionally, this round of IOUs for those who have a tax refund is further proof that it is better to owe the government money. If you are in this group it is probably a good idea to withhold less from your checks.
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1 comment so far ↓
Face it, California sucks. I am so sick of hearing about protesters out West. If you’d get a job (oh that’s right, California’s strict ‘labor’ laws that protect crybabies have caused you to have the second highest unemployment rate in the country) and learn to speak english, maybe your state wouldn’t be the sh**hole it is. Vive La Louisiane.
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