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Text size [+][-]  Saturday November 21 2009GLOBAL EDITION

Considered view
01 Jul 2009 20:37

I’ll gladly pay you Tuesday

By Robert Cyran

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California will issue promissory notes beginning on July 2 if the state’s budget is not balanced. It has a projected $24bn deficit for the fiscal year that begins on July 1. Because cash inflows will fall below obligations, the controller will issue individual registered warrants, or IOUs. These are negotiable instruments that pay interest. They cannot be redeemed until October 1, assuming the state has sufficient cash. It plans to issue $3.4bn worth of IOUs this month.

Certain expenses, such as education, debt service and civil servants’ wages will be paid normally.

Social service payments, student aid grants, assistance to local governments and payments to business vendors will be paid in IOUs.

The Golden State is short on cash so it plans to issue IOUs instead. The last time it did so, most banks accepted the scrip at face value. This time, in light of the state budget woes and economic crisis, banks may demand a discount – hurting anyone paid with these promises.

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