Transcript
[00:00:00] ROBERT SIEGEL (HOST): For 42 days now, California has been without a budget. The state is nearly $11 million in the hole and without a budget, the state continues to spend at last year’s levels. It is the worst budget crisis in California since the Great Depression and the state is covering many of its bills by printing IOUs. This crisis has actually created an investor’s opportunity for those willing to take the risk from member station KUSP in Santa Cruz, Spencer Critchley reports.
[00:00:29] SPENCER CRITCHLEY: Lacking the legal authority to spend money, California has been paying its employees, suppliers, and local governments with registered warrants. About $2 billion worth of these IOUs Have been issued so far. Few people are happy about being paid with IOUs, especially as more and more banks say they won’t cash them. But Lynn Reaser, Chief Economist at First Interstate Bank in Los Angeles, says the IOUs Have become attractive to investors.
[00:00:54] LYNN REASER: There are a number of parties who are quite enthusiastic about investing in the IOUs. They offer 5% interest And that interest is tax free. That is a much better return than for instance, some of the investments which now offer only slightly more than 3%.
[00:01:12] CRITCHLEY: One of the first investors in California IOUs Was Los Angeles County. L. A. County has been buying IOUs from less well-off local governments, partly to help those governments avoid cash crunches, partly for the interest to be made on the investment. Maureen Auster of L. A. County’s Treasurer’s office says that although L. A. County’s offer extends only to counties and cities, others are also calling her offering to sell their IOUs.
[00:01:36] MAUREEN AUSTER: Private businesses are beginning to contact us. It’s not as though we’re not interested. The problem is at the moment that not having unlimited capacity, we want to make sure that we’re able to accommodate the governmental agencies first.
[00:01:50] CRITCHLEY: In fact, major investment brokers say they’re selling California’s IOUs to businesses, individuals, and institutions all over the country. And while state employees are angry at being paid in IOUs, the state employees pension fund says it’s considering investing in them. The IOUs have in effect become a form of “scrip,” or private currency. This is not the first time people have traded in such scrip. Federal Reserve economist Arthur Rolnick says there was an active market in scrip during the Great Depression, when banks and cash-starved government agencies issued acres of IOUs.
[00:02:24] ARTHUR ROLNICK: The newspapers would publish That a $10 banknote from the First National Bank of Hibbing would only be accepted by the money brokers at a $9.50.
[00:02:37] CRITCHLEY: California’s IOUs Are not yet selling at a discount. Although economists say that might happen if the budget crisis continues long enough and the risk increases that the state might default on the IOUs. Those willing to accept higher risk would stand to get higher returns by cashing in discounted IOUs at full value. For now, though, the profit for investors in IOUs is the interest being paid by the state. Those who need cash now are the obvious losers from California’s promises to pay later. For National Public Radio, I’m Spencer Critchley in Santa Cruz.