Amid a worsening cash crisis, California controller's office started printing first batch of IOUs Thursday afternoon for the first time in 17 years.

California Governor Arnold Schwarzenegger declared a fiscal emergency to address California's deficit at a news conference on July 1, 2009.

Nearly 29,000 IOUs totaling 53.3 million U.S. dollars will be sent mostly to residents across the state still awaiting tax refunds, according to the office.

California is the first U.S. state to operate on IOU, which means "I owe you."

After the state legislature failed to reach an agreement on a balanced budget, Governor Arnold Schwarzenegger declared a fiscal emergency on Wednesday, ordering state workers to take a third unpaid furlough day each month. He also issued a new list of cuts to schools and public universities to address a deficit that his finance team now says has swelled to 26.3 billion dollars.

Schwarzenegger's latest cuts are designed to pare state spending by an additional 4.9 billion dollars.

Senate Republicans, with the support of Schwarzenegger, blocked an 11th-hour attempt by Democratic leaders to push through a slate of bills that would have staved off the IOUs.

Being the world's eighth largest economy and the most populous state in the United States, California accounts for 12 percent of the nation's gross domestic product and the largest share of retail sales of any state. It also sends far more in tax revenue to the federal government than it receives.

Analysts held that the financial trouble in California will have a tremendous impact on the U.S. economy and since most states in the United States are facing similar financial problems, the IOU pattern for a state government to operate could be followed by other states.

State Controller John Chiang said earlier that he planed to issue IOUs to the state's vendors, local agencies overseeing health programs and various recipients of state aid, including the elderly and disabled and college students.

Chiang will send 3.36 billion dollars in IOUs this month to help maintain 10.9 billion dollars in other payments, which includes money owed to investors holding California's general obligation debt, according to earlier press reports.

Hours before the first batch of IOUs was sent out, a panel of state finance officials set the interest rate for the IOUs at 3.75percent for banks and other financial institutions that are willing to accept the vouchers. Some banks have agreed to honor the paper, including Bank of America and Wells Fargo, which will do so until July 10.

California last issued IOUs in 1992. Doing so again could have serious repercussions. According to Treasurer Bill Lockyer, the decline in the state's credit rating that is likely to follow IOUs-- as it did 17 years ago -- would cost the state 3.4 billion dollars in higher interest rates over 30 years, adjusted for inflation.

Wall Street rating agencies have already warned that they are weighing downgrades to the state's credit, which would probably take years to recover, Lockyer's aides said.

(Xinhua News Agency July 3, 2009)