Calif. Senate rejects cash-saving proposal

SACRAMENTO (AP) - California's financial picture darkened Thursday after Senate Republicans blocked a legislative attempt to avoid having the state issue IOUs through a complicated cash-saving maneuver.

The move would have temporarily cut and delayed billions in education funding, raising concerns among officials that it could further strain K-12 and university finances.

The Legislature scheduled a third day of meetings today, but Democratic and Republican lawmakers remained at odds over how to solve the state's $24.3 billion shortfall, less than a week before the beginning of the new fiscal year.

At the same time, a main bond-rating agency downgraded the state's credit worthiness, citing in part concerns about the state's ability to reach an agreement before the state runs out of cash. The downgrade will make borrowing more expensive.

Schwarzenegger has said he wants to solve the full deficit at once without gimmicks that push the problem into the future. He threatened to veto the bills.

The Assembly passed three bills on a bipartisan vote by early afternoon, but the Senate fell short of the necessary two-thirds vote.

In their budget proposal, Democrats are proposing $11 billion in spending cuts and $2 billion in higher taxes on oil drilling and tobacco. Their plan also relies on filling the hole with $5 billion in fees and accelerated revenue through earlier collection of personal and corporate income taxes, and $5 billion in other solutions.

One of those additional solutions has been criticized as a gimmick that would just push the problem into another fiscal year: The provision would defer state employee paychecks by one day - from June 30, 2010, to July 1, 2010 - so about $1.2 billion would be counted against the 2010-11 fiscal year instead of the one that starts next week.

Schwarzenegger's plan would cut spending by

$16 billion, borrow $2 billion from local governments, take $6 billion from other government accounts, accelerate personal and corporate income tax collections, and cut state employee pay by another 5 percent.

Both plans would raise

$1 billion by selling the State Compensation Insurance Fund, a quasi-governmental agency that is the state's largest writer of workers' compensation insurance.

Republicans have not offered their own plan.