Near bankruptcy, California starts issuing IOU's instead of checks

Feb 2, 2009, 20:02 GMT

San Francisco - The world's eighth largest economy started issuing IOU (I-owe-you) vouchers instead of checks Monday as an ongoing budget battle and a 42-billion-dollar deficit left the state without enough cash to meet its commitments.

Governor Arnold Schwarzenegger was meeting with legislators in a bid to resolve the standoff that has prevented the state from passing a budget. State comptroller John Ching has warned that the state could completely run out of cash by the end of this month if a solution is not found.

On Friday tens of thousands of state workers will begin taking two days a month of forced leave without pay.

A representative for the state's Department of Finance said checks were not being issued for Cal Grant college scholarships, county social services and the California Highway Patrol. No state tax rebates will be issued until a plan is adopted to deal with the state's huge deficit, the Department of Finance said.

Schwarzenegger has declared a fiscal emergency as California faces a 42-billion-dollar deficit through June 2010. The massive US state has been hard hit by the recession which has seen housing prices plunge and revenues dry up.

Issuing state bonds is also tough given the paralysis in the credit markets and a credit downgrade because of the lack of a budget. Attempts to bridge the gap through a combination of spending cuts and tax hikes have been stymied by Republican legislators who reject any new taxes.