Governor Arnold Schwarzenegger issued a fiscal emergency earlier today and gave the state lawmakers one more chance to reach an agreement on a workable budget. Even if the state is able to reach a budget agreement by midnight tonight it will still mean significant cuts in state services and/or tax increases for California residents.

Failure to reach a budget agreement will result in California having to pay contractors and citizens with IOU’s.

Gov. Arnold Schwarzenegger this morning ordered state workers to take a third day off without pay each month after Republican lawmakers acting with his support blocked a Democratic proposal to ease the state’s deficit and allow the government to keep paying bills.

The Republican governor unveiled billions of dollars in additional proposed cuts to schools and public universities to deal with a deficit that he says is now $26.3 billion, an increase of $2 billion. He also announced an emergency special session of the Legislature that would allow lawmakers to act on them immediately. [...]

[...]If lawmakers and the governor do not agree on a plan to wipe out the deficit — or at least part of it — by the end of today, State Controller John Chiang will begin giving out IOUs in lieu of checks to pay debts owed by the state.

“We have one more day,” Senate President Pro Tem Darrell Steinberg (D-Sacramento) said as his house prepared to convene again.[...]

[...]Thousands of state workers, on whom the governor imposed a third unpaid day off every month, were preparing to show up outside the Capitol today to protest, according to the Service Employees International Union, which represents them. The new furloughs would begin on July 10, the administration said.[...]

[...]Meanwhile, Chiang, who acts as the state’s banker, has scheduled a Thursday morning meeting of a state board that will determine what interest rate the state will pay on the $3 billion a month in IOUs it will begin issuing to contractors and some of California’s neediest citizens, including the elderly, the disabled and the poor.

California last issued IOUs in 1992. Doing so again could have serious repercussions. According to Treasurer Bill Lockyer, the decline in the state’s credit rating that is likely to follow IOUs — as it did 17 years ago — would cost the state $3.4 billion in higher interest rates over 30 years, adjusted for inflation.

Wall Street rating agencies have already warned that they are weighing downgrades to the state’s credit, which would probably take years to recover, Lockyer’s aides said.

So far, no banks have formally committed to honoring the IOUs, said Chiang’s spokeswoman, Hallye Jordan. At least one financial institution, the Golden 1 Credit Union, said Tuesday that it plans to accept the state’s IOUs from its 710,000 members, some of whom are state contractors.[...] (Source: LA Times)

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