State Controller John Chiang said Monday that his office could be forced to defer billions of dollars in payments or issue IOUs.

He says the instability of the banking industry has made borrowing money to bridge the gap an uncertain possibility.

Gov. Arnold Schwarzenegger is raising hopes of a budget deal this week. He says he wants to work with Democratic leaders to close a $42 billion shortfall projected through mid-2010.

Schwarzenegger says he and lawmakers are making progress on an $18 billion proposal that was passed without Republican support.
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