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California Misses Deadline, May Now Have To Issue IOUs

JUDY LIN   07/ 1/09 07:43 PM ET   AP

California Budget

SACRAMENTO, Calif. — States from coast to coast began a new fiscal year Wednesday with no budget plans and with cash quickly running out, sending some to the brink of shutdown and forcing others to furlough workers and cut services.

In California, Gov. Arnold Schwarzenegger declared a fiscal emergency and ordered state offices closed three days a month to save money as the state sank deeper into dysfunction. State officials plan to pay bills with IOUs starting Thursday.

But the pain extends far beyond the West Coast. The governor of Pennsylvania is proposing a 16 percent tax increase. A budget veto by the Illinois governor left the state with no spending plan at all. Indiana barely avoided a shutdown.

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.

"I'm proud of California, even though we have our crisis," the governor said. "No one can point fingers, because as you can see, there are 30 states right now that have their fiscal year starting today that also don't have a budget, so I mean let's not get carried away and just look at California as we are the only state that cannot manage the budget."

The recession has taken a devastating toll on tax revenues and state finances. States had a cumulative $121 billion budget gap in crafting this year's budgets _ and the gap would be even bigger without federal stimulus money, said Todd Haggerty, a research analyst at the National Conference of State Legislatures.

"You can't look to any one region that's performing better than the others," Haggerty said. "You can see Arizona and California in the west, Ohio and Illinois in the middle and Pennsylvania and North Carolina in the east."

The NCSL says seven states _ Arizona, Connecticut, Kentucky, Mississippi, North Carolina, Ohio and Pennsylvania _ have experienced delays or had to extend their sessions to deliberate on the budget.

In California, which has a budget but one that is out of balance, the Legislature will have 45 days to send Schwarzenegger a plan to close a gap now pegged by the governor at $26.3 billion. After that, they can't adjourn or act on other bills until they solve the crisis.

The budget woes will lead to a third monthly furlough day for more than 200,000 state employees, bringing their total pay cut to about 14 percent. The state controller could extend $3 billion worth of IOUs for July.

Businesses that provide services to the state, taxpayers owed refunds and college students who get state help would be given IOUs. Banks are waiting for the state to decide the interest rate, so it's unclear whether people could cash them.

Pennsylvania will delay payments to vendors after a partisan stalemate over the deficit stalled approval of the state budget. Gov. Ed Rendell on Wednesday stood behind his call for a 16 percent income tax hike, saying the budget could not be balanced without it.

Meanwhile, state workers will receive only partial pay on July 17 and July 24, and after that paychecks will be withheld entirely until the impasse is solved. Workers will be paid retroactively. 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 Illinois, Gov. Pat Quinn on Wednesday vetoed the bare-bones budget lawmakers sent him, leaving the state with no spending plan. The House and Senate are expected to meet July 14 to consider an override.

Asked how long government could operate without a budget, Quinn said, "The next few days are crucial."

Mississippi lawmakers left one whole agency _ the state's utility regulatory agency _ unfunded. The Public Service Commission said it didn't know how it would function, but Gov. Haley Barbour says he can run the agency by executive order.

In Connecticut, Republican Gov. M. Jodi Rell vetoed the Democrats' budget proposal, saying it was not balanced or realistic. She signed an executive order to keep the government running without a two-year budget in place.

In Ohio, a budget impasse intensified over a proposal by Gov. Ted Strickland to put slot machines at the state's seven horse racing tracks, all but guaranteeing lawmakers would need a second temporary budget before they could resolve their differences.

Indiana narrowly averted a large-scale government shutdown after coming to terms on a budget. And Arizona, Indiana, Ohio, Connecticut and Mississippi also were among the other states that raced against the clock to pass budgets.

The mess in California could spread nationwide because of the sheer size of the state economy. The Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted before Wednesday.

Senate President Pro Tem Darrell Steinberg, a Democrat, called Republicans' refusal to vote for the measures "an irresponsible position to take."

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Associated Press Writers Juliet Williams, Samantha Young, Don Thompson in Sacramento, Julie Carr Smyth 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.

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