State issued IOUs can pay state taxes

July 7, 2009 6:58:26 PM PDT
The California budget crisis has given birth to a cottage industry. Those IOUs the state is sending out instead of checks-- are being bought and sold online. It's cash in the pocket for those who can't wait, but there is a trade-off.

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"With this economy, they can't really wait until October," says Gloria Freeman.

California IOUs have become a hot commodity. Just browse through online sites like Craigslist and you'll find people offering cash for them. Freeman has a side business auctioning furnishings and other stuff. She's decided to put IOUs up for bid to help people get their money now.

"They can't wait for another budget impasse with these IOUs. So they have to have some way to either sell them or to transfer them to someone else to at least get some money out of them," says Freeman.

Freeman is also a vendor who provides temporary staff to the state, and she'll be putting her own IOUs up for auction too. The downside is IOU holders have to be willing to accept less than face value for immediate cash. The buyers not only keep the difference, but also the 3.75 percent interest too.

"I've had all kinds of offers from 75-cents on the dollar, on up," says Freeman.

While some major banks have said they'll take IOUs until Friday, they may not cash them for non-customers and not everyone will have received their IOUs by then. Selling IOUs is perfectly legal, although the State Treasurer's office is worried about fraud.

"In this environment, there's going to be vultures that come out of their nests to try and take advantage of the situation to exploit it and rip people off. We're going to do our best to make sure that doesn't happen," says Tom Dresslar, from the California treasurer's office.

One safeguard in place is requiring these third-party transactions to have a notarized bill of sale signed by the person whose name is on the IOU. Without it, the buyer will not be able to redeem the IOU through the state in October.

An Assembly committee is also trying to ease the pain of IOUs, unanimously passing a bill allowing Californians to use those registered warrants to pay for state taxes or fees, like car registration at the DMV.

"Our credit worthiness is not going to be set by Wall Street. It's going to be set by Main Street and if we're not willing to accept our own credit, then why should anyone else?" says Assembly member Joel Anderson, R-El Cajon.

Until a budget fix is in place, more and more IOUs will be issued. Just Tuesday, another 12,000 went out totaling more than $21 million.

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