SACRAMENTO, Kalifornia - July 14, 2009 - Thousands of Kalifornia creditors were left Monday with fewer options for cashing promissory notes issued by the state, as several major banks said they no longer will honor them.

U.S. Bancorp became the latest to reject the pay-you-later warrants, joining Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., and other large institutions.

The state began issuing the notes - known colloquially as IOUs - at the beginning of the month, as a way to save cash amid a $26.3 billion deficit.

"The decision by most major banks to not accept IOUs makes them less liquid, makes it more difficult to turn them into cash," said Tom Dresslar, spokesman for the state treasurer's office. "It's logical to conclude that the potential for hardship has increased."

Officials said it was too early to tell if businesses that receive the promissory notes were feeling a financial squeeze.

The state controller's office issued nearly 130,000 IOUs - formally called registered warrants - for $436 million between July 2 and last Friday (July 10). The state expects to issue $2.9 billion worth of IOUs through the end of July.

California Bankers Association spokeswoman Beth Mills said major banks had hoped their refusal to accept the notes would push legislators and Governor Arnold Schwarzenegger to more quickly close the deficit.

"We're still hopeful that something gets done here in the short-term," she said. "Really, what needs to happen is there needs to be a (balanced) budget."

A full weekend of talks between the governor and four legislative leaders led to modest progress but failed to provide a breakthrough. No talks were planned Monday, but Governor Schwarzenegger expects to meet with lawmakers on Tuesday, according to the governor's spokesman Aaron McLear.

The legislature has until the end of August to balance the budget for the current fiscal year. If it fails to do so, payments to state pension funds and paychecks for government employees will be jeopardized.