This means that the IOUs are roughly equivalent to bonds, but with a nasty difference:
1) You don’t get to choose whether you get paid in ‘bonds’ or real cash.
2) The cash value of the IOU may be at a discount to its face value (correlation between risk of default vs yield), meaning you are really being paid less.
3) The IOUs are open ended.. who knows when you will get paid the principal. They are kind of like an interest only mortgage, but you are the bank and there is no recast to amortizing. Will the amount to pay off all IOUs be included in the next budget? Your guess is as good as mine – nothing that I know of mandates it. Claim is Oct 2 or sooner, but if no budget, or monies not allocated, you may get redeemed with yet another IOU.
The California Legislature should not be paid until the budget is passed, and all ‘lost’ monies should not be caught up. They lose the pay for the period. After all, they had a long time to get around to it.
Interesting quote from one of the links above:
Bank of America’s decision stems from its experience in 1992, the last time the state issued IOUs amid a financial crisis. The bank, along with Wells Fargo, were among the first to stop accepting the IOUs. A budget was signed about a month later.
“The longer the registered warrants were accepted, the longer it took the legislature to resolve the matter,” said Britney Sheehan, a Bank of America spokeswoman. “We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible.”
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