People holding California state IOUs -- including taxpayers, vendors and local governments -- will soon have a tougher time redeeming them, as most major banks are standing firm on a vow not to cash the vouchers after today.
Many credit unions say they will continue to redeem the IOUs for customers. But without mainstream banks as an option, recipients of the IOUs who need cash immediately could be tempted to sell them at a discount to third-party speculators, including ones popping up on the Internet.
Responding to that potential, the Securities and Exchange Commission determined Thursday that the IOUs are securities under federal law, which will generally require anyone trading them for profit to be a registered securities dealer.
The move is aimed at limiting the risk that IOU recipients could be defrauded by individuals or companies that offer to buy the scrip.
"The SEC's action has the potential to, at least a bit, reduce the shark factor and potential for taxpayers to get defrauded," said Tom Dresslar, spokesman for State Treasurer Bill Lockyer.
As lawmakers continue to butt heads over a $26-billion budget deficit, the state's payment system is expected to crank out nearly $3 billion this month in interest-bearing IOUs, also known as registered warrants.
In the last week, State Controller John Chiang's office issued 91,000 IOUs worth $354 million to people expecting tax refunds, as well as to state vendors and local governments, said spokeswoman Hallye Jordan.
The state will pay an annual tax-free interest rate of 3.75% on the IOUs, which creditors can redeem Oct. 2 when they are scheduled to mature. But if they need the funds immediately, they now may need to turn to credit unions and check-cashing companies.
Most major banks reiterated that customers could not deposit the IOUs after today. Others, such as City National Corp., said they would continue accepting the registered warrants but could stop taking them at any time.
The last time the state sent out IOUs, during a 1992 impasse between then-Gov. Pete Wilson and legislators, banks also eventually rejected the registered warrants.
"We agreed to help customers and clients on an immediate basis, but it doesn't provide an incentive for the state to reach an agreement if we just accept the IOUs through perpetuity," said Bank of America Corp. spokeswoman Britney Sheehan.
