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California Budget Deadline Looms: Schwarzenegger Vows To Veto Legislation

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SACRAMENTO, Calif. — Lawmakers around the nation spent Tuesday in grueling, around-the-clock budget sessions as they struggled to avoid government shutdowns and other painful cuts, with the most dramatic negotiations unfolding in California amid a historic $24.3 billion deficit.

The end of June marks the end of the fiscal year in many states, meaning lawmakers faced midnight deadlines to pass budgets in a year that has seen the recession take a devastating toll on government finances.

In California, Gov. Arnold Schwarzenegger and lawmakers tried to find a way to cut into the whopping deficit and avoid the need to issue IOUs for the first time in nearly 20 years. The California budget mess threatened to cause fallout nationwide because of the sheer size of the state's economy.

Arizona, Illinois, Indiana, Ohio, Connecticut, Mississippi and Pennsylvania were among the other states that raced against the clock to pass budgets _ and avoid crippling consequences.

Faced with a budget stalemate, the Ohio House voted in favor of a seven-day spending plan that will allow the state to keep operating while budget talks continue, the first temporary budget Ohio has been forced to approve in 18 years.

Indiana narrowly averted a large-scale government shutdown after coming to terms on a budget, and neighboring Illinois was likely to begin the new fiscal year without any plan for paying its employees or delivering government services. Government won't shut down without a budget, but lawmakers are faced with the biggest deficit in state history.

In Connecticut, Gov. M. Jodi Rell signed an executive order to keep the government running when the new fiscal year begins Wednesday, without a two-year budget in place. While she contends the average taxpayer won't notice any change, leaders of cities and towns fear delays in state grants that fund everything from road repairs to local education.

Pennsylvania faced the prospect of not being able to pay state employees if they cannot resolve an impasse. State workers will receive only partial pay on July 17 and July 24, after which paychecks will be withheld entirely until the impasse is solved. They will then be paid retroactively.

Gov. Ed Rendell said 10 banks and credit unions have agreed to help 69,000 state employees by offering them low- or no-interest loans and lines of credit.

In most states, the debate centers on whether states should be raising taxes to bridge the budget gaps. Schwarzenegger said 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."

State Controller John Chiang has said he will have to start issuing the IOUs on Thursday unless lawmakers take steps to stem the state's red ink by then.

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. Counties will not get paid for social programs they administer.

And 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.

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 discuss potential solutions. He later said the two sides are not even close on the potential framework of any deal to close the deficit.

The Assembly had no immediate plans to even meet Tuesday night. The Senate had scheduled an evening session, but it appeared lawmakers would address only the stopgap measures to avoid IOUs, putting off any decision about the overall deficit.

Democrats said the stopgap measures would save more than $4 billion.

Schwarzenegger's office said the governor did not want the partial fix the Democrats were proposing to delay the IOUs. 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.

California'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.

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 lawmakers reach a compromise, which would be expected sometime this year.

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.

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.

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Associated Press Writers Juliet Williams, Samantha Young, Don Thompson in Sacramento, Julie Carr Smith in Columbus, Paul Davenport in Phoenix, Christopher Wills in Springfield, Ill., Mike Smith in Indianapolis, Susan Haigh in Hartford, Conn., Emily Wagster Pettus in Jackson, Miss., and Mark Scolforo in Harrisburg contributed to this report.