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Calif. Lawmakers Race to Meet Budget Deadline to Avoid IOUs

California officials are facing a midnight deadline Tuesday to find a way to cut into a $24.3 billion state budget deficit and avoid the need to issue IOUs for the first time in nearly 20 years.

Democratic senators tried Tuesday, for the second time in two days, to pass three stopgap measures that would have preserved cash, primarily by cutting education funding remaining in this year's budget. The measures would have avoided the immediate need for IOUs but were put on hold because not enough Republicans support them to reach the required two-thirds majority.

Senate President Pro Tem Darrell Steinberg recessed his chamber so he and other leaders could "continue what I hope will be intensive and productive discussions with the parties to get something done here today."


The early action Tuesday followed the same pattern as two unproductive Democratic attempts Monday to resolve the budget problems. Both failed to draw support from Republicans.

Voting almost totally along party lines Monday, the state Senate approved a package of bills featuring spending cuts and increases in fees and taxes to close the deficit.

Republican Gov. Arnold Schwarzenegger quickly promised to veto the legislation, saying he wouldn't sign anything that raised taxes or fees beyond what he has already proposed.

"They should forget about that," he said, accusing Democrats of going through a "song and dance. Let's get to work, fix it."

The stopgap spending bills failed in the Senate when Republicans objected that the budget problems need a comprehensive solution focusing on spending cuts. All three bills had passed the Assembly last week with bipartisan support.


The stopgap bills, unlike the measures in the full Democratic budget plan, needed two-thirds majorities, and some Republican votes, to pass. Democrats said they would save more than $4 billion.

Steinberg, D-Sacramento, said Democrats would not accept the deep cuts in college aid, health care and welfare programs sought by Schwarzenegger in the governor's own budget proposal. He warned his colleagues that they could be in session until midnight Tuesday to try to reach some kind of deficit-cutting agreement.

"Let's get some common sense...," he said before the Senate adjourned late Monday night. "Let's be statespersons and let's leave by the end of the day tomorrow with the beginning of some success for California."

State Controller John Chiang has said he will have to start issuing the IOUs unless lawmakers take steps to stem the state's red ink by the end of the fiscal year on Tuesday.

The state's deficit is roughly a quarter 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.

Roughly $3 billion worth of IOUs will be issued in July unless a compromise on closing the deficit is reached quickly. They will be sent to state contractors, college students, welfare recipients, low-income seniors, the disabled and others who depend on or deliver state services.

Chiang said he will start issuing the pay-you-later warrants on Thursday.

"It's really incomprehensible, from our point of view, that the governor will allow the state to run out of cash when he has a bipartisan solution," said Assembly Speaker Karen Bass, D-Los Angeles.

Bass and Steinberg accused the governor of using last-minute maneuvers to push a laundry list of policy reforms rather than addressing the budget gap.

Democrats, the majority party in both houses, want to solve the deficit by cutting $11 billion in spending, raising the vehicle license fee by $15 to keep state parks open and increasing taxes on tobacco products and companies that drill for oil.

Schwarzenegger has proposed more aggressive cuts of $16 billion, including dropping health care for 930,000 low-income children and eliminating the state's main welfare program. He also would borrow $2 billion from local governments, take $6 billion from other government accounts, accelerate personal and corporate income tax collections, and cut state employee pay by another 5 percent.

In a sign of how the fiscal crisis is already hitting home, the board that oversees Healthy Families, which provides reduced-cost medical coverage to low-income children, voted Monday to close the program to new enrollment starting on July 17.

It would be the first time new applicants would be rejected since the program started in 1997, said Kelly Hardy, associate director of health at Children Now, a health care funding advocacy group.

"The number of kids enrolling each month has been increasing recently because of the recession. A lot more parents are losing jobs and losing employer-based coverage, so there's a lot more children who need this," Hardy said.

She said Healthy Families received applications for about 30,000 children a month for a yearlong period ending in February - up about 10 percent from the year before.

The program faces at least a $90 million shortfall in the next fiscal year, even if lawmakers reject Schwarzenegger's proposal to eliminate it, according to the Managed Risk Medical Insurance Board.

California 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.