Calif. leaders to work through night on $26.3B gap

SACRAMENTO, Calif. (AP) - With the state's credit rating near junk-bond status and more layoff notices being prepared, Gov. Arnold Schwarzenegger and lawmakers said they were prepared to work all night Tuesday to bring California's $26.3 billion deficit to a close.

Democratic lawmakers coming out of the governor's office during an evening break said they were making good progress in closed-door negotiations.

"Things are going well," said Assembly Speaker Karen Bass. Lawmakers "are prepared to be here all night until we finish."

"And we will," added Senate President Pro Tem Darrell Steinberg.

California has been battered by a cash crisis that has forced the state to lay off thousands of government workers and issue millions of dollars worth of IOUs since the new fiscal year began July 1. The governor and lawmakers are scrambling to bridge a deficit that's more than a quarter of the state's general fund.

Schwarzenegger and Republican lawmakers have been seeking deep cuts to social service programs for low-income families, seniors and the disabled. After weeks of resisting, Democrats now appear to be willing to make benefit and eligibility changes to save the state money without eliminating those programs.

Other issues, such as education funding also remain.

On Tuesday, Schwarzenegger told state employee unions that his administration would cut another 2,000 jobs.

Meanwhile, Moody's Investor Services downgraded California bonds to near-junk status, from A2 to Baa1, and placed the state's credit rating on watch for possible further reductions.

Moody's said the budget deadlock had put constitutionally required payments to bond holders at risk.

"If the state gets to a position where it is unable to make priority payments, a multi-notch downgrade may result," Moody's said in a statement.

The state's cash crisis has forced state Controller John Chiang to issue nearly 130,000 IOUs worth a total of $436 million to state vendors so far.

The administration previously sent layoff notices to 4,600 state employees, but it was unclear how many workers will actually lose their jobs because many still have an opportunity to move into special-fund posts that weren't covered by the layoffs.

The layoffs won't take effect until September, said Lynelle Jolley, a spokeswoman for the Department of Personnel Administration.

Jim Zamora, a spokesman for Service Employees International Union Local 1000, the largest state employee union, questioned the timing of Schwarzenegger's announcement Tuesday of another 2,000 job cuts.

"We recognize the seriousness of the budget crisis, but we also wonder if this is just another ploy by the governor to use state workers as pawns in his budget negotiations," said Zamora, whose union represents about 95,000 state employees.

Schwarzenegger has already imposed three furlough days a month for many workers and proposed a 5 percent pay cut for state workers that would have to be agreed on as part of budget negotiations. The furloughs bring the total pay cut to about 14 percent.

Some of the latest job cuts will come through attrition, said Victoria Bradshaw, the governor's cabinet secretary. She said the governor's recent addition of the third furlough day might work as an incentive for senior staffers to retire because some will now earn less working than they would from their pensions.

Budget talks continued Tuesday between the Republican governor and the four top legislative leaders.

The Legislature has until the end of August to balance the budget for the current fiscal year before jeopardizing paychecks for government employees and others.

---

Associated Press Writers Judy Lin and Steve Lawrence contributed to this report.