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The Californian government says it will issue 'IOU' notes instead of payments to vendors and local agencies as it struggles to close its $26 billion budget gap.
The world's 8th largest economy - is in a state of fiscal emergency.
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But the state's lawmakers have not been able to agree on a comprehensive strategy to lower its staggering debt.
The black hole has affected funding for organisations small and large.
The director of Californian nursing home Adult Day Healthcare told Reuters 70 per cent of their funding comes from the state.
'I have over 26 employees and I would have to lay all of them off. I would have to walk away from leases, vendors, and claim bankruptcy,' Nina Nolcox said.
Many other American states are also struggling ito cope with shrinking revenue from the recession.
