If the i.o.u.’s are issued as threatened, it would be the first time since 1992 — when Gov. Pete Wilson paid roughly 100,000 state employees with them — that the warrants were used to hold over those to whom the state owed money. Before that budget crisis, California last issued the warrants during the Depression.
“Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” the controller, John Chiang, said in a written statement. He added, “Unfortunately, the state’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses.”
The issuing of the i.o.u.’s would reflect the state’s lack of cash flow and its Legislature’s inability to agree on a way to close the roughly $24 billion budget gap, as tax revenues have continued to fall.
On Wednesday, shortly after Mr. Chiang made his announcement, lawmakers rejected a plan presented by Democrats to close the gap through service cuts, tax increases and accounting maneuvers intended to push some of the problem into the next fiscal year.
Before even broaching the tax increase — which Republican legislators said they would not accept and Gov. Arnold Schwarzenegger, a Republican, vowed to veto — Democrats failed to get enough Republican votes in the Assembly or Senate for the first of 20 proposed budget bills, which contained $11 billion in cuts. After the vote, the Senate president, Darrell Steinberg, dismissed lawmakers until Thursday.
In February, the Legislature passed a budget for both the 2009 and 2010 fiscal years, but the legislation was dependent on the passage of several ballot propositions that were rejected by voters in May.
In response, Mr. Schwarzenegger has proposed $16 billion in cuts, largely to state programs for the poor, like the Healthy Family Program, the health insurance program that covers more than 900,000 children, and the state’s main welfare program, known as CalWorks, which provides temporary financial assistance to poor families. He also wants to borrow millions from local governments and release some prisoners early to save money.
Republican lawmakers are more or less on board with the governor other than on his plan to borrow from localities and release prisoners or lay off corrections officers.
Democrats wish to reduce the cuts, increase taxes on cigarettes, oil production and cars, and use some accounting maneuvers to get through the years.
The threat of i.o.u. warrants “underscores just how serious this situation is,” H. D. Palmer, the spokesman for the state’s Department of Finance, said in an e-mail message, “and why it’s absolutely critical for the Legislature to get a budget package to the governor in a form that he can sign — and do it in a matter of days.”
If all sides cannot come to an agreement by July 2, the unusual i.o.u’s will be issued to a plethora of creditors.
Borrowing money to cover the shortfalls, which is usually done as the Legislature bickers its ways to a budget this time of year, was made impossible this June by the banking crisis, and the Obama administration refused a request to back loans as well.
In 1992, Governor Wilson, a Republican, issued the i.o.u.’s to state workers; the workers immediately brought a lawsuit, contending that the state had violated the federal Fair Labor Standards Act. A federal judge approved a $558 million settlement, and some workers received additional vacation time.
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