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California, other states face tough budget choices

GOV. Arnold Schwarzenegger declared a fiscal emergency yesterday to address California's deficit and ordered state offices closed three days a month to save cash.

The Legislature will have 45 days to send him a plan to balance the state's budget, which ended the fiscal year with a US$24.3 billion deficit. The shortfall is expected to grow by as much as US$7 billion because the Legislature did not enact several stopgap measures on Tuesday.

"I'm proud of California, even though we have our crisis," the governor said. "No one can point fingers, because as you can see, there are 30 states right now that have their fiscal year starting today that also don't have a budget, so I mean let's not get carried away and just look at California as we are the only state that cannot manage the budget."

Legislators in more than a half-dozen other states frantically worked to stave off government shutdowns and devastating service cuts.

In Illinois, home to the third-largest US city Chicago, 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 state leaders to resume negotiations.

In Pennsylvania, Gov. Ed Rendell said Tuesday night he didn't think an agreement with lawmakers would come soon. State workers are to 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.

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

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

Fallout from California's budget mess threatened to spread nationwide because of the sheer size of the state's economy, is eighth-largest in the world. Though California is just one of 50 US states, it is home to one in eight Americans.

California's government shutdown will lead to a third furlough day for 235,000 state employees, bringing their total pay cut to about 14 percent.

"California needed the Legislature to act boldly and with conviction. Their response was not a solution to California's budget problem but an invitation to actually a bigger financial crisis," Schwarzenegger said.

A state employee union that represents engineers immediately said it would sue to stop Schwarzenegger's latest furlough order. The Professional Engineers in California Government already sued over Schwarzenegger's previous furlough orders.

A state appeals court ruling Tuesday created more difficulties for lawmakers trying to reach a budget agreement by barring the state from raiding local transportation funds to pay for other programs. In his budget proposal, Schwarzenegger had counted on shifting nearly US$1 billion in transit money from local governments to the state.

The administration said it will appeal the ruling.

Schwarzenegger's office said the governor did not want a partial fix. Aides said he believes it would let lawmakers off the hook and make it more difficult to close the entire deficit in the weeks ahead.

One challenge in reaching a compromise has been Democrats' refusal to accept the deep cuts to college aid, children's health care and welfare programs contained in Schwarzenegger's budget proposal.

California's deficit has been widening this year as tax revenue, leaving the state with too little money to pay all its bills.

Chiang, the state controller, has said he will have to issue about US$3 billion worth of promissory notes this month to state contractors, college students and taxpayers owed refunds unless there is a budget-balancing agreement.

California will not run out of cash immediately. While spending obligations will begin outpacing revenue without a balanced budget in place, the promissory notes will delay a cash crisis until September. At that point, the state will be in jeopardy of running out of cash unless lawmakers figure out a way to pass a balanced budget.


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