Democrats have pushed for new revenues while Republican lawmakers have ruled out tax increases. They want deep spending cuts to balance the budget. Dems say that would slash the state’s safety net.
California Gov. Arnold Schwarzenegger declared a fiscal emergency to force lawmakers into a special session to tackle a state budget gap that has widened to $26.3 billion from $24.3 billion after they failed to close it on Tuesday.
Lawmakers debated late into the night Tuesday but could not agree on a plan to balance California’s budget for its new fiscal year, which began early Wednesday morning.
That cleared the way for state officials to suspend payments owed to vendors and local agencies, who instead will get “IOU” notes promising payment.
The notes would mark the first time in 17 years the most populous U.S. state’s government would have to resort to the unusual and dramatic measure — and would follow warnings by Wall Street that the state’s credit ratings may be lowered, which would increase its borrowing costs.
To conserve cash, State Controller John Chiang plans to issue IOUs to state vendors, local agencies and various recipients of state aid, including the elderly, disabled and college students.