The official name for this new money issue is registered warrants, popularly called IOUs, but it is a form of money, like a bond or a real bill. Banks are accepting these IOUs (for this week at least), and there is a market already developing for them. I'll call them CaliBonds, since that what they really are.
The CaliBonds are issued for face value, but come with an interest premium (3.75%) payable at a certain future date (starting October 2nd, if the state has cash available). In order to complete the loop and have these function fully as money, the state would just have to make them acceptable for state payments like taxes, fees, and so on.
The first batch of 27,000 Calibonds worth $53 million are being mailed today, mostly to residents owed tax refunds. By the end of July, California will have issued $3.2 billion worth of CaliBonds.
Bids on the CaliBonds are already coming in below face value as investors attempt to take advantage of their uncertainly. In all honesty, their future payment is definitely in question, so below face value is probably an accurate assessment of their value.
Looking at California area Craigslist ads, a number of people are offering to pay cash for these CaliBonds right now. Three ads posted today in Los Angeles mentioned specific amounts: one ad is offering 65%, another 70%, while another is offering 90% of face value. One ad posted yesterday in San Diego offered 85%. Some entrepreneur has also already set up an IOU exchange web site http://ioumarket.com/ (although it has only 3 ads as of Monday afternoon).
This is while banks are honoring them, this week only, maybe. What will happen when banks are no longer accepting them for deposit? Values would likely fall even further.
While they provide tax exempt income, the real difference between these CaliBonds and real bonds is that no one is offering to buy these CaliBonds. They are being forced on people who were expecting cash. The fact they are being bid at a 10-35% discount shows more of their true worth. Regular citizens, who expected a cash refund on their tax overpayments are being given the short end of the stick.
The funny part is, a 3.75% tax free return is not bad in today's environment, and normally, people don't get any interest on their refund checks. The big question, IF, IF, IF the state government makes good on the payments in October.
Payment categories protected by the State Constitution, federal law and court decisions (education, debt service, state payroll, pensions, In-Home Supportive Services, and Medi-Cal providers) will receive regular payments in cash. All other general fund payments will be paid with CaliBonds (including payments to local governments for social services, private contractors, state vendors, income and corporate tax refunds, and payments for State operations including legislative per diem).
UPDATE:
The California registered warrants were available for redemption a month early:
http://www.sco.ca.gov/eo_news_registeredwarrants.html
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A group of the biggest U.S. banks said they would stop accepting California's IOUs on Friday. The group of banks included Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and J.P. Morgan Chase & Co., among others. The banks had previously committed to accepting state IOUs as payment.
http://online.wsj.com/article/SB124692354575702881.html
If California wants to end their discounting and lack of acceptance, they need to declare that they can be used to pay state taxes and fees. Then they would actually be worth something, in fact, they would be CaliCash!
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