Source: SacBee

This is what life was like the last time California government had at least as much money in its coffers as it was spending on a daily basis:

• The leading presidential campaign contribution collector in the Sacramento metro area was GOP contender Mitt Romney.

• Baseball slugger Barry Bonds was 26 days from setting the all-time home run record.

• "Harry Potter and the Order of the Phoenix" had just set a one-day box office record for a film opening in midweek.

• The Dow Jones industrial average was at 13,861.

It was July 12, 2007, and since then California has been living on borrowed money.

As in $21.5 billion worth of borrowed money, according to state Controller John Chiang: $16.5 billion borrowed from some of the state's 1,000-plus special funds, plus $5 billion in "revenue anticipation notes," which are basically money borrowed from private investors.

But, Chiang, whose office writes the state's checks, says California is about out of stopgap tricks to pay its bills and keep all its programs running.

It's Chiang's job to wrestle with the state's day-to-day cash-flow problems while legislators and Gov. Arnold Schwarzenegger haggle over the best way to close a humongous $40-billion gap between state spending plans and projected revenues over the next 17 months.

The controller says California is down to Plan D on its checklist of paying bills. Its cash reserves are piddling; the special funds it borrows from are tapped out, and no one in the private sector is going to lend it any cash at a reasonable interest rate.

That leaves what in state government circles are called "payment deferrals" and what in real life is called "stiffing your creditors."

In this case the creditors include income taxpayers expecting refunds, college students waiting on state aid, counties that operate public assistance programs, and companies that sell goods and services to state agencies.

Chiang has said he won't write $3.7 billion worth of checks for those and other state programs if legislators and the governor haven't reached a deal by next Sunday to close the budget gap.

The controller said he must conserve what little cash the state has to be able to make constitutionally required payments to schools and interest payments to state bondholders.

"This is a very painful decision," Chiang said. "It pains me to pull this trigger, but it is an action that is critically necessary."

The state's cash situation is somewhat analogous to your family emptying its checking account, drawing down the savings account to cover checks, and only having enough left to pay either the mortgage or the utility bill.

Of course you could then file for bankruptcy protection. Under federal law, the state can't do that, but it can do something you can't: Issue IOUs.

Known formally as "registered warrants," the state's IOUs are just that. Someone – a vendor, a landlord, the water company – who is owed money by a California government agency gets a piece of paper that says the state owes them money, and will pay them the amount plus interest at some point in the future.

The only time since the Great Depression that the state has issued IOUs was in 1992, and it wasn't a pretty sight. About 1.6 million of them, worth a total of $3.8 billion, were issued during a two-month budget tiff between then-Gov. Pete Wilson and legislators.

Instead of paychecks, about 100,000 state workers got IOUs, which proved somewhat harder to cash. After the first month, many of the state's major banks quit accepting the warrants, saying the 5 percent interest they were paid wasn't worth the arduous processing needed to redeem them.

And after state employees sued, a federal judge ruled that paying workers with IOUs violated federal labor law. The state agreed in 1996 to give the affected workers extra paid vacation to compensate.

If IOUs are issued this year, they won't go to state workers. They also might not be accepted by many banks.

Beth Mills, a spokeswoman for the California Bankers Association, said the group's members still had "a lot of technical and operational questions we're trying to get some resolution on" about IOUs.

Mills said those include how secure they would be from counterfeiting, how many there might be, and how easy it would be for banks to redeem them, since banks now do most of their transactions electronically, as opposed to the paper-trail way things were done in 1992.

Chiang said IOUs won't be needed in February or March, and that he hopes like heck to avoid them altogether.

"Registered warrants create a whole other level of complexity and legal peril," he said.

For one thing, warrants would have to have a set maturity date on them, which would lock the state into making good on them whether it had the money or not.

If they didn't have a date, they could legally go to the head of the line for redemption whenever the state had cash on hand. That could jeopardize the state's ability to make education payments or bond payments.

Defaulting on those, Chiang said, "would have tremendous devastation, not only today, but for future generations."

California has never defaulted on a bond payment.

Of course the fact that IOUs still may be a few months away is of limited consolation to those who will be out of luck if Chiang pulls the no-payment trigger next week.

"For the first time in my career, there are counties facing the reality of just not being able to front the state the money to keep these programs operating," said Frank Mecca, executive director of the County Welfare Directors Association.

Mecca, who has been in the human services field for 20 years, said counties are facing a double whammy: Revenue is withering while needs are blossoming.

Statewide, he said, CalWORKS cases (welfare-to-work aid to families) rose 15 percent between September 2007 and September 2008. Food stamp cases rose 17 percent; homeless aid cases 22 percent; general aid 25 percent.

"In my entire career, I have never seen numbers like this," he said. "And on top of that, the state hasn't funded a cost-of-doing-business increase since 2001."

The cost of doing business with the state is a sore topic with many in the private sector as well.

Last year, because of a budget impasse between legislators and Schwarzenegger, the state ran up $830,000 in unpaid bills with Superior Produce, a Sacramento company that supplies fruits and vegetables to state prisons in Northern California.

The delay meant owners Michael and Cyndy Mulhern had to take out lines of credit, with their house as collateral, to pay their suppliers while they waited for the state to get its fiscal house in order.

Cyndy Mulhern said last week the company was still awaiting some penalty payments the state owes from last year, and was expecting $274,000 in February for recent orders.

"It's so disheartening," she said, "and not just on the business level, but on the taxpayer level, the citizen level. I just really wish that they would get their act together … at least one of these years."