MercoPress. South Atlantic News Agency

Deficit shocked California closes state offices and prints IOUs

The eighth’s economy of the world has begun printing its own “money”

The governor of California has declared a fiscal emergency in the US state to address a budget deficit of some 24.3 billion US dollars. Governor Arnold Schwarzenegger also ordered many state offices to close for three days each month until June 2010, with staff unpaid for those days. As an immediate reply the state began printing 53 million US dollars in IOU.

California has been one of the US states hardest hit by the recession. The move comes after state legislators missed a 1 July deadline to approve a budget for the coming financial year.

State Controller John Chiang has said the failure to meet the deadline means the state deficit will increase by up to 6.5 billion by September.

Mr Chiang told the BBC that many vulnerable people had been put in harm's way by the state's failure to agree the budget and to provide “essential dollars to help these people pay their rent, to put food on the table or to pay their utility bill”.

He had earlier warned that drastic measures would have to be taken to conserve cash, including delaying payments to companies working for the state and to those relying on benefits and grants.

Under the emergency measures, some state offices will be closed on the first, second and third Friday of every month until June 2010, with staff not paid for those days.

Mr Schwarzenegger said in a statement that although the legislature had failed to remedy the budget problems, “solving the entire deficit” remained his “first and only priority”.

“I will not rest until we get it done. I will not be a part of pushing this crisis down the road - the road stops here,” he said.

But on Friday printing presses began to roll out the first of nearly 29,000 IOUs totalling more than 53 million US dollars, most of them destined for residents around the state still awaiting income tax returns.

The unusual press run came just hours after a panel of California finance officials set the interest rate for the IOUs at 3.75% for banks and other financial institutions that are willing to accept the vouchers. Some banks have agreed to honour the paper, including Bank of America and Wells Fargo, which will do so until July 10.

The White House said it was closely monitoring the situation in the state.

On Tuesday, the Californian Senate failed to agree on Democratic proposals to shave 3.3 billion from education and other programmes as a stopgap measure to address the shortfall.

Democrats believe cuts should not slash vital social programmes while Republicans argued that much deeper spending cuts were needed to balance the budget.

Republicans and Mr Schwarzenegger have also ruled out tax increases.

California struggles to balance its budget every year, but this year has been particularly difficult.

And the size of the Californian economy - it is the world's eighth largest economy and generates nearly 13% of US gross domestic product - means what happens there matters for the rest of the country.

But Mr Schwarzenegger said that despite the crisis, he was proud of California, saying 30 more states were also yet to agree a budget.

For many states, 30 June heralded the end of the fiscal year, but several were facing crucial decisions to balance the books as the deadline neared.

Many of the states are legally required to have a balanced budget, which can mean cutting services and firing workers.