By Suzanne Perry

California charities that depend on state money to survive are facing a mixture of confusion and fear after Gov. Arnold Schwarzenegger declared a fiscal emergency and the state said it would start paying many of its bills with IOU’s.

While charities are used to California’s regular budget impasses, the magnitude of the state’s deficit — more than $26-billion — and the drawn-out battle between Democrats and Republicans on how to plug it have created an especially tense environment.

No matter what the outcome, steep cuts in spending on health and human services are expected.

“Everyone has resigned themselves to that fact,” says Cynthia Carmona, policy specialist at the Community Clinic Association of Los Angeles County. “This year is the worst we’ve ever seen it.”

Governor Schwarzenegger declared the emergency after the legislature failed to agree on a budget before the fiscal year started on July 1, ordering state offices to close for three days a month to save money.

Mariana Moore, director of the Human Services Alliance of Contra Costa, says alliance members at a recent meeting were unusually distressed about the potential impact of the current budget crisis on their organizations.

“These are very seasoned executive directors,” she says. “Many have been executive directors for 20 years and they don’t panic about anything. And they were panicking.”

Banking on IOU’s

The most immediate concern is how the IOU’s — or officially, registered warrants — will work. Despite California’s many fiscal crises, this is the first time since 1992 the state has resorted to paying its contractors this way.

State Controller John Chiang announced that in the absence of a budget deal between the governor and the legislature, the state would start issuing the IOU’s today and honor them, with interest, on October 1 (assuming the budget has been adopted by then).

But it’s up to banks to decide whether to accept them, a prospect that unsettles some nonprofit leaders.

Nancy Berlin, director of the California Partnership, a coalition of antipoverty groups, remembers when the state issued the IOU’s in 1992 and says they “created a lot of hardship and panic.” She says some banks were reluctant to honor the warrants, forcing charities to seek lines of credit.

“That works if you’re a large agency with a relationships with a bank,” she says, but not necessarily for a small day-care provider, for example, without such a relationship.

Furthermore, she says, many charities had to seek credit lines during last year’s state budget crisis, when payments were delayed, and some banks may not be as sympathetic this time around, especially those that have been hit by the economic downturn.

“To go back to your bank every year — it gets to be old news,” she says.

Beyond Delays

Gloria Standoval, executive director of Stand Against Domestic Violence, a charity in Contra Costa County, says her group will likely dip into its $250,000 credit line once the state starts issuing IOU’s for domestic-violence services. But she’s more concerned about what will happen once the state actually adopts its budget.

Governor Schwarzenegger has proposed ending state grants for a domestic-violence shelter program that provides her group with about $200,000 in annual revenue. While the legislature’s budget conference committee proposed a smaller cut, of 20 percent, Ms. Standoval is worried her group might not get paid for the services it offers while no budget is in effect.

“It may not be a problem of delayed payment,” she says. “It may be a problem of getting any payment at all.”

Other nonprofit leaders said they had similar concerns. The governor has proposed steep cuts to social services, including eliminating both the Healthy Families Program, which provides health coverage to children from low-income families, and the CalWorks program, which provides cash assistance and job help to low-income families.

While the budget conference committee rejected many of the governor’s proposals last month, it still proposed $11-billion in cuts to state programs.

Debbi Lerman, administrator of the San Francisco Human Services Network, an association of charities, says her group’s members have “a zillion questions” about how the potential cuts might affect county budgets, which pay for many social services.

“It’s sit here, hold your breath, and hope it turns out okay,” she says.

“There are so many things on the table, so many things to discuss, so many threats,” says Tom Kinoshita, public-policy director at the Silicon Valley Council of Nonprofits. “There’s total confusion everywhere.”