By Matthew Garrahan in Los Angeles and Nicole Bullock in New York
Published: July 8 2009
SourceCourt-appointed lawyers, cancer patients and alcoholics in treatment programmes have become the latest victims of California’s financial crisis, as the state grapples with a budget deficit that has ballooned to $26bn.
The state has been forced to issue IOUs after starting its fiscal year with a huge deficit and no budget in place.
While the notes were initially sent to taxpayers owed rebates, the state controller’s office, which is issuing them, said it had started sending the IOUs to court-appointed attorneys and public health programmes operated by counties in California.
Cancer patients, people suffering from genetic diseases and drug and alcohol users in county-funded treatment programmes will be affected by the cash shortage.
About $100m (€71.5m, £61m) of IOUs have been issued since California began printing the notes last week.
The state is preparing to print up to $3bn of notes and will continue issuing them until a budget deal is struck between Arnold Schwarzenegger, the state’s governor, and the legislature.
The state on Tuesday moved to control online trading in the thousands of IOUs after the notes began appearing on Craigslist, the internet advertising site.
California wants to avoid fraud and stolen notes being sold for a profit and said on Tuesday it would not redeem IOUs unless they were accompanied by a notarised bill of sale.
The rules did not apply to banks, credit unions, brokers or other financial institutions, said Tom Dresslar, a spokesman for the state treasurer’s office.
“The goal is to make sure that we’re only redeeming registered warrants from legitimate sources of the IOUs,” he said. “We want to stop this becoming a free for all.”
The IOUs are transferable, which means they can be bought and sold. SecondMarket, a New York-based firm that trades illiquid assets such as bankruptcy claims, private company stock and so-called toxic assets, has been gearing up to trade the IOUs if there is demand.
Trading will depend on how many IOUs the state issues and how long banks accept the notes for deposit at face value.
The secondary market in the IOUs is expected to grow sharply after July 10, when most of the banks in the programme will stop accepting them. “Until the banks stop accepting them, there probably won’t be a lot of traffic in them,” said Mr Dresslar.
A spokesman for the state controller’s office said: “We’re hoping that the legislature and the governor come to an agreement which will stop the secondary marketing in the IOUs from really popping up.”
Copyright The Financial Times Limited 2009