Friday, July 03, 2009
WARRANTS VERSUS CHECKS
Headlines in the newspapers this week read: “California Issues IOU’s.” We are told that in meeting its obligations in salaries and other bills, California is issuing IOU’s because they do not have the money in the treasury to pay checks. Since that cannot be done in state government in Oklahoma and most other states, this becomes a news-making anomaly of our times.
(In the case of an Oklahoma shortfall in revenue, the state agencies are automatically reduced by that percentage unless the legislature meets and decides otherwise. We cannot run budget debt in Oklahoma; borrowing is only through bonding.)
These “IOU’s” are technically called “warrants.” That means they may be presented for payment when and if there is money in the treasury to pay them. Warrants usually carry a modest interest rate.
While warrants may be new to most, they are not beyond the personal experience of some of us who worked in the public schools many years ago. When this writer was employed for the first time in public schools as a junior high principal back in 1949, we received warrants instead of checks.
These warrants were boldly labeled NON-PAYABLE across the top. Of course, this tended to shake up the newcomers a bit.
The superintendent carefully explained to us that these were warrants and not checks, and that meant the school district might not yet have enough anticipated tax collections to pay those. He assured us that there would indeed be enough money there to pay us. He explained that we could readily cash them at the local bank for the full amount, but that some other businesses might not take them or would charge a discount off their value.
These warrants carried a 6% interest rate, and the local bank collected and held them. Eventually the bank was paid the amount plus accumulated interest at a competitive rate. Warrants were a way of financing public business in reasonable expectation that taxes would be coming.
During the Great Depression, warrants were used extensively. Frequently, the taxes coming in were not sufficient to pay the warrants. In those days, banks or well-to-do investors would buy up the warrants at a deep discount to compensate for the risk.
The losers were the salaried people and vendors who served the schools. The discounts were on their salaries and bills. Thus, a teacher with a contract for $75 per month might actually receive only $50 with no later recourse. On the other hand, the bank might eventually receive their $50 plus an amount not exceeding the face value plus interest. It depended on the taxes actually collected that year as a percent of that needed to pay all the bills.
The warrant system may not be the rule now in schools, and warrants are so sound that they have been viewed as checks. But the history is there, right in our own state.
Edwin E. Vineyard, AKA The Militant Moderate
(In the case of an Oklahoma shortfall in revenue, the state agencies are automatically reduced by that percentage unless the legislature meets and decides otherwise. We cannot run budget debt in Oklahoma; borrowing is only through bonding.)
These “IOU’s” are technically called “warrants.” That means they may be presented for payment when and if there is money in the treasury to pay them. Warrants usually carry a modest interest rate.
While warrants may be new to most, they are not beyond the personal experience of some of us who worked in the public schools many years ago. When this writer was employed for the first time in public schools as a junior high principal back in 1949, we received warrants instead of checks.
These warrants were boldly labeled NON-PAYABLE across the top. Of course, this tended to shake up the newcomers a bit.
The superintendent carefully explained to us that these were warrants and not checks, and that meant the school district might not yet have enough anticipated tax collections to pay those. He assured us that there would indeed be enough money there to pay us. He explained that we could readily cash them at the local bank for the full amount, but that some other businesses might not take them or would charge a discount off their value.
These warrants carried a 6% interest rate, and the local bank collected and held them. Eventually the bank was paid the amount plus accumulated interest at a competitive rate. Warrants were a way of financing public business in reasonable expectation that taxes would be coming.
During the Great Depression, warrants were used extensively. Frequently, the taxes coming in were not sufficient to pay the warrants. In those days, banks or well-to-do investors would buy up the warrants at a deep discount to compensate for the risk.
The losers were the salaried people and vendors who served the schools. The discounts were on their salaries and bills. Thus, a teacher with a contract for $75 per month might actually receive only $50 with no later recourse. On the other hand, the bank might eventually receive their $50 plus an amount not exceeding the face value plus interest. It depended on the taxes actually collected that year as a percent of that needed to pay all the bills.
The warrant system may not be the rule now in schools, and warrants are so sound that they have been viewed as checks. But the history is there, right in our own state.
Edwin E. Vineyard, AKA The Militant Moderate
