As lawmakers rejected the core of a Democrat-backed budget plan intended to tame California’s $24-billion deficit, a top finance official warned that the budget crisis could force him to begin issuing IOUs next week.

Controller John Chiang announced that he would have to start paying many of the state’s bills with IOUs on July 2 if the partisan tug-of-war over the deficit isn’t ended by then.

With a scant seven days to that deadline, both houses of the Legislature took up one of the 20 bills that make up the latest spending plan but failed to garner the two-thirds vote needed to pass it.

Republicans in both houses voted against the measure, even though it consisted of government cuts normally embraced by the GOP and did not include $2 billion in Democrat-endorsed tax hikes on the oil and tobacco industries. They were joined by two Democrats in the Senate and one in the Assembly.


Democrats vowed to fight on, but resolution of the crisis is expected to require closed-door meetings between legislative leaders and Gov. Arnold Schwarzenegger.

Senate President Pro Tem Darrell Steinberg (D-Sacramento) said his house will meet every day, if necessary, until a budget is approved. He also challenged Republicans to produce an alternative plan to bridge the budget gap.

Schwarzenegger has offered a plan that includes deep cuts to government services and the elimination of some health and welfare programs.

Steinberg and other Democrats said they won’t budge from holding Schwarzenegger’s most severe proposed cuts at bay.


“This is a matter of conscience,” Steinberg said. “We have a sacred obligation, I would call it a moral obligation, to stand up for the least among us.”

Republicans, meanwhile, said they would stand fast against any new taxes and complained that the majority Democrats did not let them participate as a joint conference committee crafted the latest budget proposal.

“Frankly, Republicans have been frozen out of the process,” said Assembly GOP leader Sam Blakeslee (R-San Luis Obispo).

The complete budget text arrived so late, he complained, that voting for it would have been “an act of supreme faith.”


With no GOP votes forthcoming, Democrats said they were contemplating options to pass their budget revisions with a simple majority vote. Such an act would take 90 days to go into effect and blunt some of the savings they hope to achieve.

“We don’t want to go there,” said Assembly Speaker Karen Bass (D-Los Angeles). Still, she refused to rule out that possibility.

Schwarzenegger has been warning Democrats for weeks that they should drop any hope of a tax hike and embrace his deep cuts.

Aaron McLear, the governor’s spokesman, said the Democrats’ “insistence” that their budget plan be considered has cost the state “valuable time and pushed us closer to insolvency.”


The governor advanced two new proposals Wednesday in lieu of an earlier plan to borrow $1.9 billion from cities and counties. He would instead save $1 billion by stopping the state’s contribution to its workers’ health benefits and $890 million more by slashing the state’s share of funding for child welfare services and foster care.

Chiang, meanwhile, described the state’s money troubles as unlike anything “since the Great Depression,” with an anticipated $2.8-billion shortfall in July that could grow to $6.5 billion by September.

“IOUs are almost an admission of guilt that we can’t pay our bills,” said Garin Casaleggio, Chiang’s spokesman.

Without a budget solution, the controller expects next month to issue more than $3 billion in IOUs to some of the state’s most vulnerable citizens. Those would include the aged, blind and disabled, college students who receive state grants, welfare recipients and patrons of regional centers for the developmentally disabled.


Counties, which provide many of government’s services, could be hard hit.

“If this drags out into August and September, we will be in a world of hurt,” said Paul McIntosh, executive director of the California State Assn. of Counties.

Los Angeles County officials said IOUs would delay nearly $645 million expected by the end of September -- a shortfall the county can’t cover.

“This is the beginning of the statewide meltdown,” said Supervisor Zev Yaroslavsky. “People can’t go to Ralphs and buy their groceries with an IOU. They can’t go to the doctor or catch the bus with an IOU.”


The controller had to delay payments in February as the state grappled with a smaller cash crisis. The new shortfall would be nearly five times larger.

Chiang met with legislative leaders earlier this week to warn them of the consequences of further delays in adopting budget revisions. He said in a news release that resorting to IOUs “sends a signal” from Wall Street to Main Street that California is out of options.

Lawmakers said they were aware of the stakes.

“The clock is ticking and it’s ticking fast,” declared Assemblywoman Noreen Evans (D-Santa Rosa), chairwoman of the legislative budget panel that crafted the deficit-reduction package.


“Everybody’s talking about jumping off the cliff,” said Sen. Bob Dutton (R-Rancho Cucamonga). “We’re already off the cliff.”

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shane.goldmacher@latimes.com

patrick.mcgreevy@latimes.com


Times staff writers Molly Hennessy-Fiske and Garrett Therolf in Los Angeles contributed to this report.