SACRAMENTO — California must continue paying some obligations with IOUs for at least another week, according to the controller's office, as one state vendor took her fight to the courts.

Officials say they must do some number crunching to see if a budget revision signed by Gov. Arnold Schwarzenegger puts enough cash into state coffers before they can stop issuing the registered warrants.

The office of Controller John Chiang said he will determine when the IOUs will stop once he has received updated revenue projections from Schwarzenegger's finance department, expected sometime next week, said Deputy Controller Hallye Jordan. Schwarzenegger signed a revised $84.5 billion budget Tuesday that lawmakers sent him July 24.

On Wednesday, a California vendor sued state officials for paying bills with IOUs, calling the notes an unconstitutional dead weight on small businesses everywhere.

The lawsuit by Nancy Baird, who owns a small business in the San Luis Obispo area, seeks class-action status on behalf of all IOU recipients. Baird said she tried to cash her IOU with two banks but was turned away. Most major banks refused to honor the notes beyond a self-imposed July 10 deadline, despite attempts by Treasurer Bill Lockyer's office to persuade them to extend the deadline.

A loose-knit market for IOUs has emerged on the Internet and elsewhere, giving holders a place to cash in their notes at a discount.


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California, which has the eighth-largest economy in the world, begin giving out IOUs on July 2 for only the second time since the Great Depression for everything from tax refunds to services and goods, after Schwarzenegger and lawmakers deadlocked over how to close a resurgent deficit that left the state without enough cash.

"It's not going to happen overnight," Schwarzenegger told reporters in his Sacramento office yesterday after he signed the revision.

Since July 2, Chiang has issued more than 200,000 of the IOUs worth $1.08 billion. The so-called registered warrants mature in October and pay an annualized interest rate of 3.75 percent. The state has the authority to repay early if the money is available.

That may occur once Lockyer borrows cash from investors to pay bills until the bulk of taxes are collected later in the year. Lockyer had said such a short-term note sale would be costly, if not impossible, without a revised budget to reassure investors about repayment.

The amount of such a short-term borrowing won't be known until after Schwarzenegger's finance office releases revenue projections next week. State officials estimated in April that they would need $7 billion to $9 billion.

"We are just waiting for those numbers right now," said Lockyer spokesman Tom Dresslar.

The borrowing likely will include a combination of two-year revenue anticipation warrants, or RAWS, and one-year revenue anticipation notes, or RANS. Such notes are common, while the warrants are used less frequently because they cost more.

The budget leaves California, which has the lowest credit rating of any state, with a $500 million reserve.