Calif. governor, lawmakers can't agree

SACRAMENTO - California's Democratic-led Legislature is putting union interests over taxpayers' well-being, Gov. Arnold Schwarzenegger said Thursday as the state started printing IOUs for the first time in nearly 20 years.

The Republican governor said Democrats have resisted reforms he believes must be part of solving the state's $26.3 billion shortfall. Democrats said he's trying to preserve his legacy with 18 months left in office.

"The legislators' failure to act on these proposals sends a message to Californians that says, 'We want you to make the sacrifices but we in Sacramento don't want to make any sacrifices or any changes,'" Schwarzenegger said during a press conference in Fresno.

"Protecting the special interests who benefit from our dysfunctional system was more important to them than solving our deficit," he said.

Democrats said they are willing to compromise on the governor's ideas but insist they will protect children's health insurance, welfare-to-work and human assistance programs. Assembly Speaker Karen Bass said the deficit has taken a back seat to the governor's reform agenda.

"The first priority is fixing the budget and it seems as though ... the governor's priority now is about fixing his legacy," said the Los Angeles Democrat.

The governor recently proposed changes to cut state employees' pensions and adopt fraud-prevention measures for in-home caregivers and those who receive support services. Senate President Pro Tem Darrell Steinberg said while it makes sense to fingerprint workers, it may not make sense to require fingerprints from seniors and the disabled, such as a quadriplegic.

"I'm not sure that particular reform is necessary," said the Sacramento Democrat.

The governor on Wednesday ordered 235,000 state employees to take a third day off a month without pay, a move that would cut their pay by 14 percent.

Key lawmakers are expected to work through the weekend, and Steinberg said he hoped to reach a compromise soon. The Senate is scheduled to resume Monday, but lawmakers were directed to stay within four hours of the Capitol over the holiday weekend.

"While it's clear we have had and continue to have real differences, it is time to bring this to a close," Steinberg said. "I think it'll take a couple of days but I think it will get done."

Lawmakers passed a budget in February for the fiscal year that began Wednesday, but a sharp decline in tax revenue quickly put it out of balance. The national recession has battered California's economy, leading to record-high unemployment and a 34 percent drop in personal income tax revenue during the first five months of the year.

With far less money flowing to the state, Democrats have found it difficult to protect core social programs and the jobs overseen by the public employee unions that make hefty donations to their campaigns.

At the same time, Schwarzenegger and Republican lawmakers refuse to raise taxes beyond those already increased in February. It's not clear how the sides will compromise to close the budget shortfall.

Democrats likely would have to accept deeper cuts beyond the ones they've proposed, while Republicans would have to accept the governor's ideas for an emergency services surcharge on property owners and borrow $2 billion from local governments.

The state controller began printing IOUs Thursday afternoon after lawmakers failed earlier this week to address the deficit. With revenue running well short of the state's spending obligations, California does not have sufficient cash to meet all its payment obligations.

The IOUs primarily will affect the thousands of small businesses that contract with the state for a variety of services, from providing office supplies to cleaning services. A state board set the interest rate at 3.75 percent for IOUs.

Lawmakers' failure to act before the fiscal year ended Tuesday widened the state's problem by $2 billion, in large part because of the state's complex education funding formula. A cost-cutting plan that would have prevented taxpayers from being locked into billions in future spending was passed on a bipartisan vote in the Assembly, but Senate Republicans blocked the bills with Schwarzenegger's blessing on the argument that it did not address the entire problem.

On Wednesday, the governor declared a fiscal state of emergency and ordered most state offices to close three days a month to conserve cash.

Schwarzenegger said Thursday he would not sign any bill that comes to his desk unless it pertains to the budget. Under the fiscal emergency order, if the Legislature fails to solve the deficit within 45 days, it cannot adjourn or act on other bills until the crisis is resolved.