Many California credit unions will accept state IOUs – formerly called registered warrants - even though many banks say they will take the IOUs only until Friday, July 10.
But some entrepreneurs are stepping in. A search on Craigslist for “California IOUs” turns up numerous offers to buy the warrants for cash at a discount.
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The state started paying more than $3 billion in bills with the IOUs because it has run out of cash, and the legislature and governor have yet to come up with a solution to more than $26 billion in red ink for the state budget. The state will pay 3.75% interest on the IOUs Oct. 2, or earlier if it comes up with the cash.
The last time the state had to issue IOUs was 1992. Click here for more information about the warrants.
The payments affect product and service vendors and contractors with the state. Small businesses and independent contractors could have financial problems waiting to get their money. State employees, and recipients of Social Security and unemployment benefits are being paid normally, not receiving IOUs.
Financial institutions can accept the IOUs for face value before they are eligible for redemption, and then the institution will get the interest, not the creditor, according to State Treasurer Bill Lockyer.
But Bank of America, Wells Fargo Bank and Citigroup are among the banks that have said they will accept IOUs only until July 10.
But California Credit Union League analyst Daniel Penrod said, “More than 50 credit unions told us they are accepting the IOUs and not putting a time limit.”
There are 490 credit unions in the state, but Penrod said the league has not found any that will not accept the warrants.
“Credit unions are being very proactive in letting their members know they will accept IOUs,” Penrod said. “Credit unions are owned by their members. Some have specialized memberships, such as public employees or firefighters.”
For example, Schools First Credit Union in Santa Ana is limited to school employees and their families in 10 California counties.
“School employees will be paid as usual, but we have gotten calls from members about the IOUs so we want them to know we will accept IOUs from our members,” said Jose Lara, Schools First senior vice president.
Penrod said some credit unions might be unable to accept the warrants because of pressures of the credit crunch, ”but the vast majority have higher capital levels built in to handle situations like this.”
Penrod said the 3.75% interest rate on the IOUs was quite high for such short-term loans, given the current market. “To get 4%, you’d have to lock your money up for five years.”
Bank of America issued this statement:
“To support our customers, while giving the government additional time to pass a budget, we will accept California state-registered warrants – or IOUs -from existing customers and clients,” the bank said. “Based on state disbursement estimates, we will accept the registered warrants through July 10.”
Wells Fargo head of community banking Lisa Stevens, said in a prepared statement:
“Wells Fargo has a long history of taking extraordinary measures to help our customers and will accept registered warrants from our customers, but only for a limited time, to allow them time to make other arrangements. We are reluctant to take this step, but are doing so to help our customers who are not at fault and with the expectation that the Legislature and Governor will complete the budget within days. We join all Californians in urging our Legislature and our Governor to take the appropriate steps as soon as possible to resolve this budget crisis.”
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