For just the second time since the Great Depression, California began paying some of its bills with IOUs Thursday, as this year's version of the state's annual budget battle dragged on.

The IOUs began going out a few hours after state financial officials set a 3.75 percent interest rate on them, along with a redemption date of Oct. 2.

Several of the state's leading banks, meanwhile, said they would accept the IOUs, formally known as registered warrants, but only until July 10. Others had not decided yet.

"Given the poor credit rating of California – the worst in the nation – banks may be hesitant to extend credit to the state," Rod Brown, president and CEO of the California Bankers Association, said in a prepared release.

While legislative leaders and their number crunchers scurried between closed-door meetings, and Gov. Arnold Schwarzenegger held news conferences in Los Angeles and Fresno to demand quick action, the state controller's printing presses began churning out 28,742 warrants, worth $53.3 million, which will be mailed to people awaiting tax refunds.

Instead of a check, they'll get an IOU and a letter of explanation. For Californians not getting a letter of explanation, here are answers to questions they might have, such as:

Why can't a state with the eighth-largest economy on Earth pay its bills?

The short answer is that state government doesn't have enough money on hand. Even in good times, the state faces a cash shortage at the start of fiscal years because tax revenues come in later on.

And these are really bad times. Controller John Chiang has determined that he won't have enough money to meet a constitutional mandate to pay education bills and money due state bondholders and pay other bills. So the other bills will get IOUs.

Who gets stuck with them?

People and companies that do business with the state, cities and counties, and those awaiting tax refunds are the main victims.

Thanks to a 1993 federal court ruling, state employees won't get them. Nor will the state pension funds or recipients of health and social service programs.

The federal Social Security Administration has notified the state it will pick up the state's share of SSI/SSP payments for July and August, and officials are working to extend that arrangement if necessary.

Was 1993 when IOUs were last issued?

Close. It was in the summer of 1992. A budget tiff between the Legislature and then-Gov. Pete Wilson led to the issuance of 1.6 million IOUs, worth about $3.8 billion, over a two-month period.

The state did issue about 100,000 IOUs in February 1983 that had been printed up because of a big budget fight. The fight got resolved just as the IOUs were set to go out, so the state issued them with instructions they be redeemed as regular checks and not treated as IOUs.

How many IOUs are there likely to be this time?

That depends on how soon the governor and legislators can settle on a solution to the state's budget deficit. Assuming it's a reasonable plan, and not smoke and mirrors, that would allow state Treasurer Bill Lockyer to borrow money from private investors to ease the cash flow crunch.

That kind of borrowing, with instruments called Revenue Anticipation Notes (RANs), is the way California traditionally deals with its cash flow problems.

Absent a budget deal soon, Chiang has estimated it might take $3.2 billion worth of IOUs this month, and another $1.65 billion in August. After that, you don't want to know – but it's huge.

What are these puppies going to cost taxpayers?

Assuming the 3.75 percent rate, Oct. 2 date and a need for $4.85 billion through July and August, about $45.5 million in interest, according to the Department of Finance.

What's a registered warrant look like, anyway?

Like a regular state check, only it has "registered" stamped on the front and an endorsement box on the back full of legalese.

Chiang says they are as safe and secure from counterfeiting as regular state checks.

Call Steve Wiegand, Bee Capitol Bureau, (916) 321-1076.