California sets terms for redeeming sold IOUs

By Jim Christie

SAN FRANCISCO (Reuters) - California's state treasurer's office said on Monday it would redeem "IOUs" issued by the state in lieu of payments amid its cash crunch if they are sold through eBay, Craigslist or other means only if certain requirements are met.

Foremost of the requirements, if recipients of the IOUs sell them to third parties, they will be redeemed by the state treasurer's office only if accompanied by a notarized bill of sale signed by their listed payee, the treasurer's office said in a statement.

"We are in the process of contacting officials of eBay and Craigslist to post a notice of the policy on their sites," the statement said.

Speculation is rising over whether California's tax-exempt IOUs, technically registered warrants, can be bought, sold and traded.

The Securities and Exchange Commission must first determine if the IOUs are securities to regulate them, said Ernesto Lanza, general counsel to the Municipal Securities Rulemaking Board, adding that the board was not working directly with the commission on that decision.

"It looks like it has all the hallmarks of a security," Lanza told Reuters. "If they are securities, I think they're pretty clearly municipal securities."

California last week started issuing "IOU" promissory notes for some bills to conserve cash for priority payments, including payments to investors holding the state's debt, while Governor Arnold Schwarzenegger and lawmakers try to plug a $26.3 billion budget deficit and stave off a cash crisis for the state's government.

The IOUs carry a 3.75 percent interest rate and are payable October 2.