SACRAMENTO — Now the real work begins.

As Controller John Chiang warned Wednesday that he is preparing to issue billions of dollars in IOUs because California is running out of money, a Democratic plan to close the state's $24 billion deficit failed in both houses of the Legislature.

That outcome was widely expected, and it triggered Sacramento's latest sprint to avoid insolvency. Facing a crucial deadline next Thursday, Democratic and Republican leaders began what's expected to be a feverish round of negotiations during the next several days to bridge a $2 billion to $3 billion gap between the two parties.

"I think we're close," said Sen. Abel Maldonado, R-San Luis Obispo, who provided a decisive vote for the Legislature's last attempt to patch the deficit in February. "This kind of thing happens every year," he said.

The problem is, lately it's been happening every few months. This time around, legislators appear to have no choice but to find a compromise soon. A budget package must be adopted by next Thursday in order to secure short-term loans to pay the state's bills, Chiang said.

He said he will begin issuing IOUs instead of checks starting that day to pay the state's bills if a budget isn't passed. The IOUs will go out to agencies including the Student Aid Commission, which provides Cal Grants to college students, and to the Department of Social Services, which disburses cash aid to welfare recipients, the blind and the disabled.


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Private vendors and taxpayers expecting state refunds would also receive the IOUs, which could not be cashed until October unless the recipient's bank agrees to honor them sooner. The last time the state issued IOUs was in 1992.

On Wednesday, Democrats put up for votes a bill containing about $11 billion in spending cuts. The measures required a two-thirds vote to pass but fell short in both chambers — mostly along party lines.

The proposed cuts would hit public schools, universities, health and human services, prisons and most other state programs. Democrats also proposed $1.9 billion in tax increases on oil extraction, tobacco and car registrations, but those were not put up for a vote on Wednesday, given fierce Republican opposition.

The question now is whether the two sides can find a compromise in time to avoid a fiscal meltdown.

Democrats say they're unwilling to shred the safety net for the poor and disabled.

"If that is the price for garnering your vote for a budget, respectfully, forget about it," Senate President Pro Tem Darrell Steinberg, D-Sacramento, told Republicans during Wednesday's debate.

Schwarzenegger and Republicans, meanwhile, have ruled out tax increases and say they oppose at least some of the billions of dollars in accounting maneuvers proposed by Democrats.

"The Legislature now must make the necessary cuts or allow the state to go off the cliff," the governor's office said in a statement after the votes.

Another factor that could work against the Legislature: Both the Senate and Assembly Republican leaders were only recently installed by rank-and-file members, who ousted the previous leaders after they compromised with Democrats on the budget plan approved in February.

After Wednesday's Senate vote, Minority Leader Dennis Hollingsworth, R-Murrieta, called for $19 billion in reductions, about $3 billion more than Schwarzenegger has proposed. He declined to provide a specific list.

"We need to get back to work and solve the problem before we run out of money," Hollingsworth told reporters.