State May Issue IOUs Instead of Tax Rebates

As if California's budget crisis is not bad enough, now comes this little tidbit from the state.

State officials say they are bracing for the possibility of delaying tax refunds to millions of Californians, along with student grants and payments to vendors, as the latest round of budget negotiations between Gov. Arnold Schwarzenegger and Democratic legislators fell apart.

With a budget gap reported at just under $42 billion, State Controller John Chiang has said that as early as Feb. 1, his office may begin issuing promissory notes if lawmakers have not resolved the budget crisis. California has done this only once before since the Great Depression -- in 1992.

According to California's Constitution, schools and bondholders get first rights to any cash in the state's coffers. The initial folks to receive IOUs instead of payments would be business and individual taxpayers who are expecting refunds, local governments and recipients of grants from the California Student Aid Commission.

Last year, more than 10 million taxpayers obtained state refunds totaling $8 billion.