State leaders talking again - budget woes go on State's fiscal crisis

Assembly Speaker Karen Bass, D-Los Angeles, talks with reporters as she and Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo leave Gov. Arnold Schwarzenegger's Capitol office during a break in a budget negotiations in Sacramento, Calif., Friday, July 10, 2009. less Assembly Speaker Karen Bass, D-Los Angeles, talks with reporters as she and Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo leave Gov. Arnold Schwarzenegger's Capitol office during a break in a budget ... more Photo: Rich Pedroncelli, Associated Press Photo: Rich Pedroncelli, Associated Press Image 1 of / 1 Caption Close State leaders talking again - budget woes go on 1 / 1 Back to Gallery

California's fiscal crisis continued unabated Friday with most major banks refusing to cash the state's IOUs starting today, the state controller delaying $4 billion in payments to public schools, and Gov. Arnold Schwarzenegger and legislative leaders still looking for a compromise to solve the state's huge deficit.

Schwarzenegger and the four legislative leaders returned to the negotiating table Friday for the first time since Monday, when Assembly Speaker Karen Bass, D-Baldwin Vista (Los Angeles County), refused to meet with the governor. She protested that his insistence on long-term budget fixes would have little or no impact in closing the current $26.3 billion shortfall.

The state's top leaders met for about 2 1/2 hours Friday afternoon before taking a break.

"Negotiations have started out on a good note," Schwarzenegger said outside his office.

State Senate President Pro Tem Darrell Steinberg, D-Sacramento, called the talks "the most constructive discussion we have had in weeks."

By early evening, the legislative leaders returned to Schwarzenegger's Capitol office for additional closed-door talks that continued into the night. The leaders said they expected to meet through the weekend.

As the state's top leaders continue to struggle to find a compromise in erasing the massive deficit, the state's finances continued to crumble.

State Controller John Chiang and state Superintendent of Instruction Jack O'Connell said $4 billion in payments to local school districts that were supposed to go out on Friday will be delayed until July 30. The move will conserve cash for the state, which has been issuing IOUs since July 2.

O'Connell said this is yet another example of the state's public schools receiving a disproportionate share of pain in the state's fiscal crisis.

As of Friday morning, the state controller had mailed 101,930 IOUs covering more than $389 million in payments, said Hallye Jordan, a spokeswoman for Chiang.

And despite a plea from state Treasurer Bill Lockyer that banks extend their Friday deadline to accept the IOUs, most refused to do so.

Citibank agreed to a one-week extension, while Bank of the West said it will accept IOUs until further notice. The banks that rejected extension requests include Bank of America, Wells Fargo, JPMorgan Chase and Union Bank, said Tom Dresslar, a spokesman for Lockyer.

The pain of IOUs will be especially excruciating for vendors that have contracts with the state, business owners say.

Receiving IOUs as payment has been like adding insult to injury because the state hasn't been making its payments on time this year, they say.

"The Department of Corrections alone owes (me) about $18,000," said Ken Jackson, whose company has been delivering janitorial supplies such as hand towels and toilet paper to state buildings and prisons for nearly two decades. He received an IOU for $2,300 that he deposited, he said, but his bank, Westamerica in Vallejo, won't accept IOUs as of today.

"What we're doing is floating the state," Jackson said. "And my suppliers are not going to float me."