The first batch of IOUs to be issued by cash-strapped California have been printed and will be sent to people awaiting income tax rebates on Thursday unless Governor Arnold Schwarzenegger manages to strike a last-minute budget deal with the state government.

With the state teetering on the brink of fiscal collapse, the controller’s office is scrambling to issue about 30,000 IOUs, which California is offering instead of tax rebates because it has run out of money.

Thousands more IOUs will be printed in the next weeks if a deal cannot be reached.

The state is preparing to issue IOUs equivalent to a month’s worth of funding – or $591m – for programmes that provide supplemental income to the elderly. Another batch, worth $363m, will be issued to a network of regional non-profit centres across California that work with the developmentally disabled.

Other US states are also grappling with ballooning budget deficits that have been exacerbated by the recession and collapse in property values. Of the 46 states with fiscal years ending on June 30, Arizona, Illinois and Pennsylvania have failed to agree balanced budgets. Connecticut was given an extension of another month. North Carolina and Ohio have passed temporary measures.

States faced a cumulative budget gap of $121bn this year, according to the National Conference of State Legislatures. A range of drastic cuts are being considered to narrow the deficit. Recently, New Hampshire approved a budget that will cut the state’s workforce by at least five per cent.

California is in the most trouble. It must address a record $24bn budget deficit, yet its assembly cannot agree on whether to make deep cuts or implement steep tax increases.

Its problems will increase the longer the stalemate continues. Its credit rating has already been cut to reflect the budget deadlock. It has the worst credit rating in the US and it is likely to fall to junk status if a deal cannot be struck.

Mr Schwarzenegger favours a complete overhaul of the state government, with the aim of making a series of far-reaching changes that reduce waste and unnecessary spending.

These cuts have been resisted by Democratic members of the legislature. Two Democrat-sponsored measures which would generate significant savings were vetoed by Mr Schwarzenegger late on Tuesday.

“I have been very clear that the legislature must solve the entire deficit, must make the hard decisions now, and must not push the problem off to tomorrow,” he said.

Californians must try to find a bank that will take their state-issued IOUs. Talks have been held between state officials and banks to determine whether they will accept the IOUs in lieu of cash. An interest rate will be set on Thursday.