Holding the party line on budget

GLENDALE — California’s financial fate continued its tumble into uncertainty this week as lawmakers failed to agree on a solution for a projected $24.3-billion deficit, despite warnings that the state will soon have to pay for some of its obligations using IOUs.

Controller John Chiang on Wednesday warned that historic drop-offs in tax revenues have put California close to insolvency as it tries to pay for billions in services for which funds are not available.

A continued impasse in the Legislature, Chiang said, will force him to begin issuing IOUs July 2 in the place of payments for local governments, private contractors, state vendors, income and corporate tax refunds, and other operations, including salaries for legislators.

“Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression,” Chiang said in a statement. “The state’s $2.8-billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit free-fall. Unfortunately, the state’s inability to balance its checkbook will now mean short-changing taxpayers, local governments and small businesses.”

Lawmakers tried to pass a stopgap measure Thursday to prevent IOUs by delaying payments to schools and local governments, but Gov. Arnold Schwarzenegger vowed to veto the proposal, arguing that legislators need to come up with a complete solution, not a piecemeal approach to the shortfall.

“Since the first day we began working to solve this $24-billion deficit, I have been clear: The Legislature must solve the entire deficit, must make the hard decisions now, and must not ask California taxpayers to foot the bill,” Schwarzenegger said in a statement. “The current proposal in the Legislature amounts to nothing more than a piecemeal proposal and a second day of drills, and if passed, I will veto it because it doesn’t solve the problem.”

Local legislators are split on how best to solve the growing shortfall, mirroring a party-line divide in the Legislature between solutions that include only spending cuts, or a combined approach involving some tax and fee increases.