California Won't Accept Its Own IOUs | Hacker News Reader

California Won't Accept Its Own IOUs

courthousenews.com

56 pointsgasull28 comments

You have to pay taxes on your income, but you cannot pay taxes with your income.

I'm confused:

"17. Can I use my registered warrant to pay my State taxes? You can use a registered warrant to pay some of your State tax liabilities, although you will not receive interest unless you hold the warrant until it is redeemable. For more information, visit the Franchise Tax Board’s website at www.ftb.ca.gov." from: http://www.sco.ca.gov/5935.html

And: "We will accept registered warrants that are not yet redeemable for full face value towards the payment of tax liabilities." from: http://www.ftb.ca.gov/aboutFTB/newsroom/Registered_Warrants....

Is the state not accepting them for payment of sales tax? Or?

Aside from that... 3.75% interest on those, that is tax free. Sounds like a deal to me.

Great reason not to do business with the state. In any other transaction you get to dictate the form of payment, but in the government's case it's the other way around because you have no recourse if they renege.

Actually, you can sue them, which is what the businesses in question are doing.

It's not the best recourse, but it is the recourse intended by our system.

If anyone wants to sue over this, pay attention to which day you go to file - all California courts will henceforth be closed the third Wednesday of every month. Your public dollars at work.

I don't understand how the IOUs are constitutional

Article 1 Section 8 (Powers of the Federal Congress)

"To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;"

Clearly states and townships are allowed to borrow money.

Which means that they can issue bonds.

If a bond is tradeable on the open market, how is it different from currency?

In short: financial engineering has evolved a bit in the last 200 years, muddying some formerly clear cut issues.

Were bonds actually issued to the small business owners in this case? The article only mentions the nebulous "IOU's"

They're IOUs because the average person reading the stories about them won't understand what it means if they said they were bonds (they'd think commercial paper, if anything).

If you read hardcore financial papers, they're effectively bonds backed by the State of California.

Yeah, the SEC determined they are "securities" or bonds...they pay an interest rate.

I don't think it's any violation of the Constitution per se.

Put it this way. As is pointed out in the other comment a Bond is not considered currency and states issue those. A Bond in is just a certificate of debt. Whoever issues the bond is borrowing money from you and then paying you interest in return. So it represents currency but is not in itself currency.

An IOU is simply a Bond that doesn't collect interest. California is in effect using it's governing power to force it's vendors to buy high-risk, no interest Bonds from them.

An IOU is simply a Bond that doesn't collect interest.

A dollar is a t-bill with an interest rate of 0% and a maturity of now.

Look, I didn't make the rules. But the bottom line is in economics there is currency and there is debt. Is debt just the absence of currency? Isn't Debt worth as much as the currency it represents? Does that make the line blurry?

Yes on all counts. But that's how it works. Debt does not count as currency.

California IOUs do pay interest, at a rate of 3.75%. Since you are resident in CA, I am surprised you did not check the basic facts about this. http://www.sco.ca.gov/5935.html

Yeah, but when companies issue bonds, they use the real money issued from the sale of these bonds to pay down debts of creditors. In this case, if the IOU's are like bonds then they should be sold on the market, and the real money collected should be used to pays these small businesses, which are the state's creditors. I know a state is not a company, but when raising capital via debt, you can't just force someone to accept these IOU's when they are owed money.

But California can't sell them on the open market which is the point.

Think of it this way. California is at a point where they can't stop themselves from spending more than they owe and the result of that is no one in their right mind would ever buy a Bond from them. Because there's a really good chance they'll be bankrupt before they could pay it off.

So what the state is doing is taking the people they have complete power over (those who did work for them expecting payment at a later date) and giving them a certificate of debt so they can continue to pay creditors whose services they need and who they have no power over.

Why can't they sell them?

http://en.wikipedia.org/wiki/Municipal_bond

Many other states and munis do.

Whether its a good investment or not is dictated by the risk and interest rate associated to it. You can't not pay your obligations which in this case would be the interest rate to cover today's expenses. Otherwise we are talking about a larger issue which would be bankruptcy.

I think he meant that they can't afford to sell them. The financial condition of an issuer dictates the yield (i.e. interest rate) that investors will require to buy the bonds. California's condition is so poor that the required yield would be very high, so they have decided to force feed this debt to people who are already their creditors (in short term payable/receivable sense) but were expecting to be paid in currency.

It is Article 1, Section 10 that is of interest because it expressly forbids states from coining money or emitting bill of credit.

"Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

Just because this is an enumerated federal power doesn't mean it's automatically denied all other entities, and money issued by sources other than the federal government was once common in the US. See:

http://www.clevelandfed.org/research/Commentary/2007/010107....

IOUs are not currency, and so no government body is compelled to accept them as payment...including the government body which issued them.

Private entities are not regulated by the constitution, which is why you can have tokens and gaming chips as legal tender in arcades and casinos.

Yeah. I'm VERY glad I'm not a vendor to the state.

Given that the state of California's budget has been getting progressively worse annually, I can't wait to see what next year brings :(

Imagine the problem they would have if they did take them as taxes. Ultimately CA must pay back its debts with federals, and the federals must come from taxation, eventually. (That or a bailout) Taking IOUs instead of cash is a serpent-eating-its-tail scenario.

This is actually how hyperinflation can occur, as CA has, in a sense, two forms of money--one they don't control, and one they do. For now, the one they control -sort of- has value, while the one in which their debts are denominated is uncontrollable. If the US and CA were separate countries, and inimical to one another, the US could drive those IOUs down to nothing.

I don't understand your first paragraph. Taking their own IOUs is equivalent to reducing the debt. The problem is that they effectively want to borrow money against the IOUs for free, by refusing to accept the IOUs as tax payments.

Incorrect. If I am the state of California and you are a bondholder to whom I owe $1 in daily interest, which must be paid in cash, accepting IOUs in the form of tax receivables doesn't reduce my debt to you at all.

Taking them in reduces the liability 9and thus the interest payable) on the outstanding IOUs, which I agree looks like a good thing. Thing is that California needs the cash now whereas it has invoked its authority to pay on the IOUs later, because the state's contractual promises to its bondholders are more onerous than the promises it makes to its suppliers.

Unfair? Sure. States need cash more than they need goods, so they give better terms to suppliers of liquidity than they do to suppliers of goods and services.

In a best-case scenario for CA, it could pay down its entire debt with IOUs. After that, its finances would somewhat improve because the IOUs pay (I think) three percent interest rather than whatever the bonds do. But then, imagine if the bond holders could sell those IOUs to California citizens for 99 cents on the dollar so that they could pay their taxes with them. The state would suddenly have its own paper on its books and would then need to borrow 26 billion dollars overnight, and the bond market would spank them. Of course, in that same scenario, they could conceivably just pay out the IOUs again, which is how a normal currency works.

Taking them piece meal as taxes would do the same thing, more slowly.

Agreed.

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