Tax refunds and welfare checks to be replaced by IOUs.

SACRAMENTO, Kalifornia - January 26, 2009 - The state of Kalifornia has run out of money.

Facing a $42 billion budget deficit, State Controller John Chiang told the Sacramento Bee he has already borrowed $21.5 billion to try to cover the state's checks, but by February 1, there will be no more options left but to simply stop paying some of the bills - including tax refunds, welfare checks, student grants and other payments owed to Kalifornia citizens.

"It pains me to pull this trigger," said Chiang at a news conference held in his office. "But it is an action that is critically necessary."

Federal law requires that many school and healthcare programs - a total of about $6.6 billion in Kalifornia - must be paid, the Los Angeles Times reports, so Chiang has announced an expected payment freeze on $3.7 billion worth of the state's bills, most of it refunds owed to taxpayers.

Formally called "registered warrants," the state's IOUs consist of little more than a piece of paper that says the state owes a payee money, plus interest, to be paid at some point in the future.

Even with the spending freeze that begins next week, the Times reports, Kalifornia will still fall $346 million short for the month of February, forcing Chiang to consider the issuance of IOUs, which has only been done once before, during the Great Depression.

Ed. Note: Why doesn’t the state stop paying government worker benefits first?  After all, the taxpayers are supposed to be the owners, and government employees, public servants.  Shouldn’t the servants’ benefits be cut before the state welches on what it owes to the masters?