Legislators at loggerheads over making budget cuts

State controller warns of IOUs if stalemate goes on

By Steve Wiegand, Jim Sanders
swiegand@sacbee.com and
and Susan Ferriss sferriss@sacbee.com

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SACRAMENTO — California's budget mess got even messier Wednesday, with the failure of legislators to reach a compromise on spending cuts, the state controller warning he will issue IOUs next week instead of checks, and no clear idea of what to do next.

"How can the people of California have a clue what we're doing if we don't?" asked Assemblyman Jim Niel-sen, R-Gerber, as the Assembly debated a proposal to make $11 billion in program cuts.

Nielsen's comment was in reference to the fact that GOP legislators didn't receive copies of the inches-thick bill until an hour before debate began.

But it also reflected the general tone of a day in which:

• State Controller John Chiang announced he would be forced to pay the state's bills with IOUs, beginning next Thursday, if lawmakers and Gov. Schwarzenegger can't reach agreement on a budget-balancing plan to close a projected $24.3 billion deficit by Tuesday, the end of the current fiscal year.

• The first formal effort to reach an agreement flopped, when majority Democrats in both houses failed to get the necessary two-thirds approval for the spending cuts bill, one of 20 measures in the budget-balancing package.

• Rumors and speculation rampaged through the Capitol as to what steps might come next in the state's fiscal odyssey, from borrowing money from the lottery to revisiting major changes in state workplace rules.

In a news release issued even before legislators began debating, Chiang said the state was facing "a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression."

It's not uncommon for the state to start a new fiscal year with a cash shortage, and it generally borrows money from the private sector until tax revenues catch up with spending later in the year. But without a balanced budget in place, Chiang and state Treasurer Bill Lockyer have warned, private lenders won't pony up the money.

Hallye Jordan, a spokeswoman for Chiang, said the state faces constitutionally mandated payments to schools and bond holders in July.

That means almost everyone else the state owes money to — except state workers — would get a registered warrant. A 1996 federal court ruling forbade the state from meeting its payroll with IOUs.

California hasn't issued warrants since 1992, and that was the only time since the Great Depression. The warrants, which banks and other financial institutions don't have to accept, will pay interest, and will have a maturity date of Oct. 1.

State financial officers said issuing the warrants would cripple the state's ability to borrow money from Wall Street.

"If the state starts issuing IOUs, the damage to our credit rating could be substantial and long- term," said Tom Dresslar, spokesman for Lockyer. "It could take years to recover."

The state might be able to head off issuing the IOUs if legislators and the governor could agree to quickly free up enough money to pay bills in July.

One possibility would be to defer some payments to schools and other programs in the fiscal year that ends June 30 until later in the next fiscal year.

"It's certainly something we are open to discussing," said Senate President Darrell Steinberg, D-Sacramento.

But even reaching agreement between Democratic and Republican lawmakers on which direction the sun comes up seemed problematical Wednesday.

GOP legislators were particularly vexed that they weren't given enough time to plow through the mountain of paperwork that represented the Democrats' budget-balancing package.

Democrats said the package was the product of the two-house, two-party conference committee that took a month of public testimony before producing the proposals.

But at least one bill in the package — which would allow the California Lottery and State Compensation Insurance Fund to invest in financial instruments the state issues to raise cash — was a mystery even to Niel-sen, a member of the conference committee.

"You've just shown me something that I'm not even aware of," he told a Sacramento Bee reporter after being shown a summary of the bill. "That's scary stuff."

Democrats were similarly irked by suggestions being raised by Republicans that negotiations include several proposals that state business leaders and the governor have favored in the past. Those include relaxing state work rules governing overtime pay, the length of work days and meal-and-rest breaks.

Steinberg said Democrats weren't interested in letting Republicans leverage their votes on the budget package with unrelated issues. "It's too late for that," he said.

Bipartisan harmony also was noticeably missing during Wednesday's debate over the bill to cut $11 billion from a wide range of state programs. No Republicans in either house voted for the bill. Three Democrats — Sens. Leland Yee of San Francisco and Lou Correa of Santa Ana, and Assemblyman Sandre Swanson of Alameda — also voted no.