Bartels' CB Enterprises provides 35 state prisons, hospitals and schools with nearly $12 million worth of apples, carrots, corn and other produce and dry goods each year.

This week, for the first time, state buyers began pressuring Bartels — and more than 2,000 other vendors — to cut back on winning bids for state contracts that pay him just pennies of profit.

"We're already as tight as can be. We cut it really close and try to do enough volume to make a living," Bartels said.

So far, he hasn't had to lay off any of his five employees from the firm 80 miles south of the capital.

"I can't really predict what's going to happen," Bartels said. "I'm holding my breath a little bit."

State Treasurer Bill Lockyer is pressuring the major banks to keep accepting the IOUs after Friday's deadline. The state has printed more than 91,000 IOUs worth more than $350 million so far, and plans to issue nearly $2.9 billion to pay its July bills.

"To the extent the banks remain in the game, the potential hardship on IOU recipients is reduced and the potential for taxpayers to get ripped off by con artists also goes down," said spokesman Tom Dresslar.

The U.S. Treasury and Federal Reserve were not asking banks to change their decisions.

"We're not encouraging banks one way or the other," said Federal Reserve spokeswoman Barbara Hagenbaugh.

Many of the state's credit unions plan to keep cashing the IOUs. But California Bankers Association spokeswoman Beth Mills said the major banks aren't budging.

"They're still willing to help their customers on an individual basis," Mills said. "There might be an ability to issue short-term loans while they're not getting paid by the state."

Bank of America spokeswoman Julie Westermann said her bank was not extending its deadline beyond Friday.

Schwarzenegger planned to meet with legislative leaders Friday after a week of little progress. He spent much of the week publicizing social services reforms that he said would save the state money by reducing waste and fraud. Democrats objected that the measures would do little to help the state's immediate budget problems.

Former U.S. Rep. Tom Campbell, a constitutional law professor at Chapman University School of Law in Orange County, believes vendors would prevail if they sued the state in federal court if they can't cash their IOUs.

"Their claim is you have violated the right of contract or you have taken value from me without paying me, and that's contrary to the Constitution," said Campbell, who is seeking the Republican nomination for governor. "A federal judge will, I think, quite quickly say 'You're right.'"

The California Chamber of Commerce and state chapter of the National Federation Independent Businesses were not offering their members any advice on how to survive if the banks stop accepting the state warrants.

Businesses around the state Capitol were unusually quiet Friday, the first of three monthly "furlough Fridays" imposed on many state employees by Schwarzenegger to save the state about $1.7 billion.

State prisons, hospitals, police and firefighters were operating, and parks and jobless centers remained open. But most other agencies, including the Department of Motor Vehicles, were closed.

Associated Press Writer Juliet Williams contributed to this story.