San Franscisco: California Controller John Chiang said he may have to use IOUs for the second year in a row to pay some government bills unless politicians close the $20 billion (Dh73.4 billion) budget deficit facing the most-populous US state.

Chiang, the elected Democrat who pays the government's expenses, said in a letter to Governor Arnold Schwarzenegger and legislative leaders yesterday that California faces another potential "cash crisis" in July if lawmakers can't reach a budget agreement before the fiscal year ends June 30.

By July 29, California will have $1.1 billion less than it needs to pay its bills should lawmakers stall, he said.

"If solutions are slow to emerge and if they are neither credible nor sustainable, California will once again be unable to timely meet all of its payment obligations and my office will be forced to seek costly emergency financing, or conserve cash by delaying payments or issuing IOUs," Chiang wrote.

The state issued $2.6 billion of the vouchers last year to pay bills, resorting to promissory notes instead of cash for the second time since the Great Depression as Schwarzenegger and the Legislature were deadlocked over how to close an imbalance that totalled $26 billion at the time.

The tactic allowed it to preserve cash for the highest-priority bills, including payments to bondholders, until an accord was reached and the state was able to sell debt to generate funds.

California faces another political struggle over an annual budget forecast to swell to $102.6 billion next fiscal year, from $87 billion this period, according to figures Schwarzenegger released this month.

Spending cuts

His January 8 proposal recommended paring expenditures to $82.9 billion for next year by steps including $8.5 billion of spending cuts and seeking $7 billion in federal aid.

Some of his proposals were denounced by Democrats who control both chambers of the Legislature, setting the stage for another prolonged battle in the statehouse.

The deficit has widened out again as the recession reduces tax collections and boosts demand for social services. California's jobless rate was 12.4 per cent last month, compared with the national average of 10 per cent, the Labour Department reported.

Employment fell in 39 states in December, led by California's loss of 38,800 jobs, according to the department.