Controller John Chiang says that if Gov. Schwarzenegger and the legislature cannot work out a budget deal, the state will run out of cash in about two months - and that means his office will need to take such drastic steps as issuing IOUs. In a letter to the governor and the four legislative honchos, Chiang says the crisis could "begin a cascading series of regrettable actions necessary to conserve the State’s dwindling cash reserves." Those options, he says, would have "the unintended effect of deepening and prolonging the recession." Wowser. From the letter:

I also have directed my staff to immediately accelerate the efforts necessary to issue a Revenue Anticipation Warrant (RAW), a rarely-used and extremely costly form of external borrowing. However, given the strained condition of the financial markets, the lack of market liquidity and the current condition of the State’s finances, this type of financing may not be possible. A high risk of failure exists even assuming the imposition of high fees and that the Legislature adopts triggered spending reductions and/or tax increases that likely would be necessary to ensure that money is available to allow us to repay a RAW at maturity.

Translation: Even loan sharks might turn down the state of California. That's how bad things have gotten. But is anybody paying attention? Here's the full letter, from Capitol Alert.

*Meanwhile, two public employee unions went to court to block Schwarzenegger's effort to furlough state workers as a cost-cutting move. The suit claims that only the legislature can alter the pay of workers who have labor contracts with the state. (LAT)