The IOUs will be issued in July to private businesses and others and will not pay them until October at the earliest, according to State Controller John Chiang. The State Constitution, federal law and court orders prohibit the use of registered warrants for education, debt service, state payroll, pensions and some health care services.

State Controller Chiang said Tuesday that without action by the governor and legislature to stave off a cash deficit of almost $3 billion at the end of July, he will be forced to issue registered warrants beginning July 2. A protracted stalemate over budget solutions will increase the cash deficit to a projected $3.7 billion in August, $6.5 billion in September, he says.

If there is sufficient cash available, the July registered warrants will be paid by the State Treasurer on Oct. 1, 2009. If more registered warrants are issued in August and September, they would be payable on Nov. 1, 2009, and Dec. 1, 2009, respectively. No bank has yet publicly committed itself to honoring the IOUs, according to the Controller's office. The banks are reportedly waiting to learn the interest rate, which is expected to be announced later this week.

Jason Goff, managing director of Jones Lang LaSalle in Sacramento tells GlobeSt.com that building owners like most vendors likely begin to receive some type of notice of delayed payment later this month if a budget isn't passed soon. If payments are delayed for multiple months it could prevent building owners from covering their loans, pushing more of them into default.

"The good and the bad is this isn't the first time in the past few years this has happened so I think most people have been anticipating this and have reserved their cash flow accordingly; most lenders will not honor IOUs," he says. "So everyone is being very prudent and watching cash flow but if someone goes two or three months without getting rent it will become precarious at some point."

A spokesperson for the state Department of General Services, which manages the state's leases, tells GlobeSt.com that building owners will receive rent checks in July because the state pays rent one month in arrears. If the state can't cover rent in July, however, lessors wouldn't receive payment or a registered warrant that earns interest, she says.

"If July comes and there's no budget then on the last week of the month we will issue a letter to lessors informing them that their payments will be late; it won't actually be an IOU," she says. "It will state something to the effect of 'once the budget is signed and chaptered we will expedite payments'."

Paul Meyer, executive director of the American Council of Engineering Companies of California, also says his members are familiar with delayed payments from the state when there is a budget impasse. That said, he adds that this time around could be worse and that multiple consecutive IOUs by the state to businesses assisting in the state's infrastructure projects would present a real danger of stop work orders.

"There are a lot more unknowns than knowns at this stage; it's a humongous mess and it appears to be getting worse," he says. "Stopping construction and making a site safe and then trying to gear up later is very, very expensive. It's a little less expensive when it's still in the design stage but it is still costly."