How do California IOU's Work

Ah California...my beloved state. The state of my birth where I have grown up, lived, worked and raised my family. Palm trees, beautiful weather, golden suns, dreamy blue beaches...also being known as the broke state now issuing IOU's.

HUH?

It's true. In the first time since 1992, California started printing and issuing IOU's last week.

IOU's are registered warrants that are a “promise to pay,” which are issued by the State when there are not enough funds to pay all of its General Fund obligations"

Q: Who will get IOUs? (from the SF Gate, home of the SF Chronicle)

A: The state would use IOUs to pay:

-- Businesses that contract with the state.

-- People and businesses getting income tax refunds.

-- The Student Aid Commission, which makes Cal Grants to college students.

-- Social service programs including CalWORKS, mental health, drug and alcohol programs.

-- The state's portion of Supplemental Security Income and State Supplementary Payment programs for blind, disabled and low-income seniors. However, the federal government will pick up the state's unpaid share and the state will reimburse the federal government.

So basically, many vendors, needy families and social services program will now receive printed IOU's saying, "I'll pay you later,k?"

It's unimaginable, really.

So I won't go into all the reasons of how we got into this economic crisis here in California. As in business, there are usually many things lead which lead to financial failure (been there and done that) What I will say however, is that there is a whole lot of difference between a business going broke and a whole state going broke. One would imagine (or at least hope) that there would be many people overseeing and preventing a whole state from collapsing, which seems to be what is happening here. Many months ago I wrote about "Is California Going Bankrupt?" which at the time seemed likely. Now months later, it's not only looking likely but inevitable due to the fact that once again we have not only failed to pass a budget (again) but are over 26 billion dollars in debt.

Yes, you heard that right, 26 billion dollars. So what's a state to do when it's broke and can't pay it's bills? Issue IOU's and hope to heck that in a few months they can be honored.

(and yes you heard me say the word "hope" here. I would not want to "assume" at this point that these "IOU's" will be good in a few months. We can hope but we all know what the word "assume" means, right?

So "assuming" that the state of California will be able to honor these IOU's, just when will one be able to trade in their IOU for real money? According to Jon Chiang, California state controller, the IOU's will be honored Oct. 2, 2009. Some banks may even "cash out" the IOU's before this, but it is up to the individual to check this out with their financial institution.

(from the California's state controllers website:)

* Will my financial institution honor a registered warrant?
Recipients of registered warrants should contact their financial institution to determine whether they will honor the registered warrant before the redemption date.

* 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 2, 2009.

So basically, you MAY be able to get the IOU cashed out for REAL money before the Oct.2 date. MAYBE. If I were you and I could, I would. Better cash in hand, right?

At the bottom of this hub you will find the official California state website links with FAQ's for more information on the California IOU's. If this article has been helpful a thumbs up would be appreciated and feel free to follow me here at Twitter and Facebook.

In summary, the question of the day for me would be this: If California does go bankrupt, will these IOU's be any good?

(Dorsi Diaz is a freelance writer/blogger who lives in the San Francisco Bay Area)