The state's growing budget gap, compounded by political fights and ballot initiative votes, forced it this week to start paying its bills with "registered warrants."
California Controller John Chiang has issued 28,742 of the official IOUs totaling $53.3 million. If state lawmakers fail to reach a budget deal by the end of August, the IOU amount would grow to $4.8 billion.
The drastic action means that if you're a state vendor, local government or yes, even just a regular individual taxpayer, you'll get a California "registered warrant" instead of a check.
As good as cash, for some: Luckily for Californians, several banks -- Bank of America, Wells Fargo, Chase and Union Bank -- have agreed to cash the warrants.
But you'd better get to your participating branch as soon as you get your IOU. The banks say they'll cash the IOUs from customers only through July 10.
City National also will cash the warrants and it hasn't set a cutoff date … yet.
Many credit unions also have agreed to accept the IOUs from their customers with no time limit, according to the California Credit Union League.
State loans, fed warning: Essentially, the financial institutions are floating California loans, at the state-promised interest rate of 3.75 percent, on the value of the IOUs.
For folks whose banks or credit unions accept the state paper, the warrants are as good as cash. But folks whose banks won't take the IOUs will have to wait for payment until the state has funds available to make good on the notes.
California officials are hoping that will be, at the latest, by October. At this point, though, who really knows.
And just to add another thing to worry about in this mess, we have the Federal Reserve weighing in with a warning that says, in part:
Depositors of these warrants may be subject to returned-deposit fees if their banks attempt to collect these warrants before they are payable. In addition, if customers rely on these funds to make other payments, they may be subject to overdraft or bounced-check fees if the warrants are returned.
Talk about adding injury to insult.
Don't depend on tax refunds: All this chaos in California is yet another reason not to plan on tax refunds at any level.
Now I'm not saying the U.S. is going to get into the same leaky financial boat as California and many other states. But why do you want to depend on Uncle Sam or his state cousins to get you your tax refund money in the first place?
Refunds can be delayed. Remember that Kansas found itself in a similar, but thankfully, very short-term situation earlier this year.
At the federal level, things like stimulus payments overburden operations and cause a slowdown in processing.
And refund checks at all governmental levels can get lost or misdeposited.
So you're much better off paying the IRS and your state tax department only the amount that your owe. An even smarter move is to owe them a small amount.
That way you have your cash in hand year round and you never have to worry about the status of your tax refund.
More on the morass: The California Controller's Web site has posted some frequently asked questions about the state's IOUs.
You also can read more on the California budget crisis in the Los Angeles Times, the Washington Post and the New York Times. Or Google "California IOU" and take your pick of the almost 4,000 articles dissecting the state's budget crisis.
Some of my fellow bloggers with thoughts on the IOU issue are:
- A California IOU at The Scratching Post
- Who's to blame for California's IOU budget crisis, Ahnold or the Dems? at ShortFormBlog
- TARP Banks Begin To Accept California IOU's at Wizbang
- Will Banks Demand Discount on California I.O.U.'s? at DealBook
Even the Governator is getting in on getting out the word. Arnold Schwarzenegger makes his case for how to fix the Golden State's tarnished financial situation in an L.A. Times op-ed piece.
Your next step: As for what you, Jane and John Taxpayer, can do, adjust your state and federal withholding so that it's as close as possible to your eventual tax bill.
Some tips on how to do this can be found in Give yourself a tax-related raise.
The IRS also has an online withholding calculator to help you figure out just the right amount to have taken out of your checks.
The bottom line is that you, not your tax collector, need to take control of your money. This applies to every taxpayer in every state and in connection with both your state and federal tax withholding levels.
Take care of it now!