California, other states face tough budget choices

SACRAMENTO, Calif. -- Legislators in more than a half-dozen states, their revenues evaporating in the recession, frantically worked to stave off government shutdowns and devastating service cuts. California failed to meet a midnight deadline and now may need to issue IOUs instead of paying bills.

Across the country, lawmakers are feeling the heat as their legislatures began the new fiscal year without a budget in place.

In Illinois, the sputtering drive to come up with a state budget broke down completely Tuesday, leaving the state without any plan for paying its employees or delivering government services. The session ended without any firm plans to return or even for Gov. Pat Quinn and legislative leaders to resume negotiations.

In Pennsylvania, Gov. Ed Rendell said Tuesday night he didn't think an agreement with lawmakers would come soon. The state faces the prospect of not being able to pay state employees if they cannot resolve an impasse.

The end of June marked the end of the fiscal year in many states, meaning lawmakers worked late Tuesday to pass budgets in a year that has seen the recession take a devastating toll on government finances.

Fallout from California's budget mess threatened to spread nationwide because of the sheer size of the state's economy. The Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted before Wednesday.

Senate President Pro Tem Darrell Steinberg, a Democrat, called Republicans' refusal to vote for the measures "an irresponsible position to take." At least two Republican votes were needed to put together the two-thirds majorities required to approve the legislation, which passed the Assembly last week with bipartisan support.

Arizona, Indiana, Ohio, Connecticut and Mississippi also were among the other states that raced against the clock to pass budgets -- and avoid crippling consequences.

Faced with a budget stalemate, the Ohio House voted in favor of a seven-day spending plan that will allow the state to keep operating while budget talks continue, the first temporary budget Ohio has been forced to approve in 18 years.

Indiana narrowly averted a large-scale government shutdown after coming to terms on a budget.

In Connecticut, Gov. M. Jodi Rell signed an executive order to keep the government running without a two-year budget in place. While she contends the average taxpayer won't notice any change, municipal officials fear delays in state grants that fund everything from road repairs to education.

In Arizona, House lawmakers approved nine bills late Tuesday to implement most of a compromise budget negotiated with Gov. Jan Brewer. But they omitted two controversial tax proposals, including a sales tax increase that Brewer has insisted on. The Senate followed by giving the same Republican-drafted bills preliminary approval.

In Pennsylvania, state workers will receive only partial pay on July 17 and July 24, after which paychecks will be withheld entirely until the impasse is solved. They will then be paid retroactively.

Gov. Ed Rendell said 10 banks and credit unions have agreed to help 69,000 state employees by offering them low- or no-interest loans and lines of credit.

In most states, the debate centers around whether states should be raising taxes to bridge the budget gaps. California Gov. Arnold Schwarzenegger said he wouldn't sign anything that raised taxes or fees beyond what he has already proposed.

"They should forget about that," the Republican governor said, accusing Democrats of going through a "song and dance. Let's get to work, fix it."

State Controller John Chiang has said he would have to start issuing the IOUs on Thursday unless lawmakers took steps to stem the state's red ink by then.

Roughly $3 billion worth of IOUs will be issued in July unless a compromise on closing the deficit is reached quickly. They will be sent to state contractors, college students, welfare recipients, low-income seniors, the disabled and others who depend on or deliver state services. Counties will not get paid for social programs they administer.

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Associated Press Writers Juliet Williams, Samantha Young, Don Thompson in Sacramento, Julie Carr Smyth in Columbus, Paul Davenport in Phoenix, Christopher Wills in Springfield, Ill., Mike Smith in Indianapolis, Susan Haigh in Hartford, Conn., Emily Wagster Pettus in Jackson, Miss., and Mark Scolforo in Harrisburg contributed to this report.