The California Senate shut down at midnight Tuesday after failing to approve a stopgap plan to stave off the need for IOUs and ease the state's $24.3 billion budget deficit.
Voting along party lines, the Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted by Tuesday. The new fiscal year started Wednesday.
The measures fell two votes short of the two-thirds majorities needed to send them to the governor's desk, but Gov. Arnold Schwarzenegger said he would not sign any bill short of a complete solution to the deficit.
That stand brought a rebuke from Senate President Pro Tem Darrell Steinberg, D-Sacramento.
"What an irresponsible position to take when our problems are already as severe as they are," Steinberg said in asking his colleagues to support the stopgap bills. "Don't be a party to that."
Failure to approve the cost-saving measures will add to the state's deficit, perhaps by as much as $7 billion, because of the state's complicated school-financing system.
At least two Republican votes were needed to put together the two-thirds majorities required to approve the three bills, which passed the Assembly last week with bipartisan support. The Senate's 25 Democrats supported the bills, but 14 of the 15 Republicans voted no.
One Republican, Sen. Abel Maldonado of Santa Maria, abstained, but Sen. Alex Padilla, D-Los Angeles, said Maldonado's vote for the bills wouldn't have mattered.
"He would only have gotten us to 26," Padilla said.
State Controller John Chiang has said he will have to start issuing IOUs on Thursday unless lawmakers and the governor agree on a way to at least ease the state's red ink.
The Assembly and Senate previously passed a Democratic budget plan that included tax increases and spending cuts, but on Tuesday Schwarzenegger vetoed some of the bills that would implement it.
A state appeals court ruling Tuesday created more difficulties for lawmakers trying to reach a budget agreement. The decision by the 3rd District Court of Appeal barred the state from raiding local transportation funds to pay for other programs. In his budget proposal, Schwarzenegger had counted on shifting nearly $1 billion in transit money from local governments to the state.
If they are unable to take that money, the governor and lawmakers would have to find another source of funding or make additional cuts. Administration officials said they plan to appeal.
Frustration over the size of the budget shortfall and the inability to find common ground was evident on the Senate floor late Tuesday.
As midnight approached, Steinberg accused Republicans of holding the state hostage by not voting to accept the $3.3 billion in immediate savings that would avoid IOUs.
"This is craziness. There's no excuse for it," the Senate leader said.
Another Democrat, Sen. Mark Leno of San Francisco, criticized Sen. Dave Cox, R-Fair Oaks, for asking the presiding officer if he could get up and walk around while the Senate waited until midnight to adjourn, suggesting that Cox was making a joke when he should have been serious.
"We're about to lose $7 billion in just six minutes," Leno said. "The president pro tem has done everything in his power to prevent this from happening. We work in good faith. That folks are joking in this room is beyond understanding."
Senate Minority Leader Dennis Hollingsworth, R-Temecula, said neither he nor his GOP colleagues wanted to see the state resort to IOUs. But he said voters expected lawmakers to close the deficit at once, not act in piecemeal fashion.
"Getting the job done is defined as fixing the problem," he said.
Schwarzenegger's office said the governor did not want a partial fix. Aides said he believes it would let lawmakers off the hook and make it more difficult to close the entire deficit in the weeks ahead.
"If you solve for a little bit now, do we have any confidence or faith that the Legislature is going to come back to work tomorrow morning and solve the rest of it?" Schwarzenegger spokesman Aaron McLear said Tuesday.
"I think that based on the way things have gone the last couple of years in budget negotiations, I don't think that anybody in California has faith that we solve a little bit now, a little bit next week, a little bit after that."
One challenge in reaching a compromise has been Democrats' refusal to accept the deep cuts to college aid, children's health care and welfare programs contained in Schwarzenegger's budget proposal.
The governor has offered a compromise to those cuts, seeking structural reforms to state programs instead. Over the weekend, he proposed reducing state pension benefits for new hires, shifting enrollment for the state's health insurance for the poor online to reduce government jobs and requiring in-home caretakers to submit to fingerprint and background checks to prevent fraud.
He also wants reforms to the state's welfare program. In all, those measures would save California $2 billion in the fiscal year that begins Wednesday, according to his office.
California's deficit will now grow to nearly a third of the state's general fund and has been widening this year as tax revenue has plunged. That has left the state with too little money to pay all its bills.
Chiang, the state controller, has said he will have to issue about $3 billion worth of IOUs this month to state contractors, college students and taxpayers owed refunds unless there is a budget-balancing agreement. Counties will not get paid for social programs they administer.
California will not run out of cash immediately. While spending obligations will begin outpacing revenue without a balanced budget in place, the IOUs will delay a cash crisis until September. At that point, the state will be in jeopardy of running out of cash unless lawmakers figure out a way to pass a balanced budget.
The state already has a budget in place for the 2009-10 fiscal year, thanks to a two-year budget package approved in February, but the spending plan is badly out-of-balance. The main culprit is the recession, which caused a 34 percent plunge in personal income tax revenue during the first five months of the year.
