California’s massive budget problems are finally culminating in IOU’s being issued to vendors and providers to the State, including building owners leasing space to various state government departments. With a $24 billion budget deficit and no solution in sight, the Governator and State Assembly must start issuing registered warrants (IOUs) to vendors due to a cash flow problem. The IOUs are a promise to pay with interest, once there is enough cash to make monthly obligations.
None of the IOUs will be redeemable prior to October 1st, with later dates more likely. Building owners will probably see notices of delayed payment from the State later this month, particularly if the budget is not passed soon. The dark undercurrent here is that if the payments are delayed for multiple months, it could keep owners from meeting their loan obligations, thus forcing more foreclosures.
The GSA (General Services Administration – they oversee state leases) intends to pay rent checks in July for June obligations since the State pays rent one month in arrears. But July rent (paid in August) is likely to see the issuance of IOUs. Even though this is not the first time the State of California has had to issue registered warrants, the current economic climate compounds the impact. State projects under construction could face stop work orders, thus costing the initial project budgets to skyrocket as the projects have to be made “safe sites” while they are on hold and then restarted at a later date.
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