The California legislature's runaway spending spree of the past decade -- with the assistance of Gov. Arnold Schwarzenegger and Gov. Gray Davis before him -- has brought us to the point that the state is going to run out of money.

In the midst of a housing market that is in the tank and an overall economy that's in a pretty impressive recession (but hardly a depression -- yet), the state legislature and Schwarzenegger are proposing budget cuts and tax increases. Yes, tax increases in the midst of a recession.

Gov. Arnold Schwarzenegger's administration on Wednesday released his latest plan to close a deficit projected at $41.6 billion over the next 18 months, a proposal that looks much like one he released months earlier.

The Republican governor wants $17.4 billion in spending cuts and $14.3 billion in tax increases and other new revenue, though legislative members of his own party remain steadfastly opposed to tax hikes and are able to block them.

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The administration's proposal also relies on $10 billion in borrowing and a plan approved by the Legislature to sell bonds to Wall Street investment firms based on the future value of the state lottery.

I suppose I should be grateful that spending cuts are included in the "plan." However, the truth is that there's surely got to be a lot more to cut since state spending has increased 32 percent since the supposedly fiscally responsible Schwarzenegger took office in 2003. 32 percent! Homeowners have been castigated -- properly -- for believing in recent years that their homes would only increase in value. But how insane did the state legislature have to be to believe that they could increase spending at the rate they were indefinitely?

And what is the first hint that Californians are going to get that Sacramento is a mess? When they get their state income tax refund. Let me rephrase that. When they get IOUs in lieu of their state income tax refund.

The last time the state issued IOUs was in 1992 -- a result of a state budget impasse. I got a couple of those IOUs because my job during the school year was at Cal Poly. Back then, many banks accepted the IOUs and treated them the same as cash. With the IOUs this time representing not a political dispute but a genuine lack of money to back it up, coupled with the mess that is the banking industry, it wouldn't be a surprise if Californians don't see their overpaid taxes returned to them before summer.

This new reality may pose problems for the state -- and federal government -- in the future. It's often noted that having your withholding set too high is the equivalent of an interest-free loan to the government. Most people don't mind this terribly because getting a big check once a year from the government, rather than a little more money with each paycheck, is nice. That calculus changes when you're not getting a big check from the government, but instead an IOU that is suitable for hanging on your wall, but not for spending. I'm skeptical that any of the companies I owe money to are going to take an IOU.

What kind of fiscal crunch would millions of taxpayers more accurately monitoring their withholding levels so that the state doesn't have its interest-earning slush fund for much of the year? I don't know, but when your budget is in the billions of dollars the potential cash flow loss is not insignificant.