IOUs May Be Needed, Davis Warns : Budget: Controller tells governor the state needs to borrow about $2.5 billion or issue registered warrants again to pay its bills.

State Controller Gray Davis warned Thursday that the government will run out of cash this spring and begin paying its bills with IOUs again unless Gov. Pete Wilson agrees to borrow enough money to get the government through the fiscal year, which ends June 30.

With Wilson preparing to announce his proposed budget today, Davis said the state’s general fund will be $2 billion in the hole by mid-May because the bills it has to pay will exceed the amount of available tax revenue.

Davis, a Democrat, said he will ask the Republican governor to authorize borrowing about $2.5 billion from private investors. That would be enough to carry the state through Labor Day without IOUs, or registered warrants, even if there is another budget impasse to match last year’s 63-day stalemate, he said.

The request is reminiscent of one Davis made a year ago, when he asked Wilson to borrow $4 billion to stave off the use of IOUs. Wilson agreed to borrow $750 million because he hoped that the prospect of IOUs would prompt the Legislature to come to terms with him on the budget by July 1.

But Wilson’s strategy failed and the budget deadlock lasted until Sept. 2. During the delay, Davis issued about $3.7 billion in IOUs to state employees, health care providers and vendors who had sold goods and services to the state. One Wall Street firm cited the IOUs in downgrading the state’s credit rating.

“IOUs are the most expensive and the most offensive way of borrowing money,” Davis said.

He added: “What I don’t want to do is borrow so little money that if July 1 comes and there’s no budget we’re back in the soup. We should act professionally. We should pay our bills in a professional manner and not put medical providers, vendors and all other payees at risk.”

Davis said the cash crunch will loom by late April, when the state must pay $1.3 billion to the public schools and $2 billion to private investors to repay a routine cash flow loan. On May 12, the state will owe investors another $2.5 billion.

The controller said there is no danger that the government would default on its obligations to Wall Street. Instead, Davis said he will set aside enough money to pay off the state’s debts and issue IOUs for other claims for everything from telephone bills to the tab for food delivered to state prisons.

Wilson’s communications director, Dan Schnur, said the controller’s recommendation was premature.

“If the circumstances he’s outlining do occur, at that point we’ll discuss the options for short-term borrowing, just like we did last year,” Schnur said.

The governor, meanwhile, announced that his budget proposal today will include a reorganization of the executive branch to save $150 million.

The proposed reorganization would result in the elimination of scores of advisory boards and commissions, and Wilson said he will ask the Legislature to consider abolishing the Franchise Tax Board, the California Energy Commission and the Department of Savings and Loan.

Wilson also said he will ask the Legislature and the judiciary to accept a 15% cut in their operating budgets, which would save about $47 million a year. He said he would give up his $40,000 personal expense allowance and ask other constitutional officers to do the same.

Although Wilson has belittled similar suggestions from lawmakers as insignificant when compared to the multibillion-dollar deficits facing the state, an aide said a third year of shortfalls has forced the governor to look for every possible reduction.

“Every dollar we can save through cutbacks in operating costs and expenses is another dollar that can be spent on schools, health care and other urgently needed programs,” Wilson said in a statement.

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