State Budget Woes Worsen As Deadline Arrives California is poised to issue IOUs as the state Legislature and Gov. Arnold Schwarzenegger fail to reach an agreement; several other states face issues of their own.
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State Budget Woes Worsen As Deadline Arrives

States across the country got their 2010 fiscal years off to a bumpy start Wednesday, as some faced shutdowns with their budgets in limbo and others braced for deep cuts after passing bare-bones plans to deal with recession-driven revenue shortfalls.

California Gov. Arnold Schwarzenegger began the new fiscal year by declaring a fiscal emergency after lawmakers failed to close a $24.3 billion budget gap. The move means the Legislature has 45 days to pass a budget or it will not be allowed to act on other matters — or adjourn.

The state is on the brink of issuing IOUs instead of payments to vendors and state workers after Schwarzenegger and state lawmakers failed to strike a budget compromise Tuesday. Wednesday is the beginning of the fiscal year for most states.

Schwarzenegger also has said he will sign an executive order forcing more than 200,000 state workers to take a third furlough day each month and that he will propose other cuts.

"Though the Legislature failed to solve our budget problem yesterday, rest assured that solving the entire deficit remains my first and only priority, and I will not rest until we get it done. I will not be a part of pushing this crisis down the road — the road stops here," he said.

Meanwhile, the state's controller said he'll have to start issuing promissory notes, with the first batch going out to taxpayers awaiting refunds.

Brian Sigritz, of the National Association of State Budget Officers, said California, Mississippi and Rhode Island has special challenges in passing their budgets because they require a two-thirds majority in both houses of the legislature. Most states require a simple majority.

While some states weren't able to get budgets passed, others — including Ohio and Connecticut — have temporary plans or executive orders in place to get them through the beginning of the month.

"Forty-two states went back and cut their 2009 budgets after they passed them. That's the largest number we've ever seen. That number may be as high in 2010 as revenues for states continue to come in lower than expectations," Sigritz said.

Most states have a balanced-budget requirement that mandates the budget be balanced by the end of year. State coffers were emptied this year by falling personal income tax revenues, which make up a big portion of state income. In January-April 2009, personal income tax collections fell 26 percent, leaving many states to make budget cuts through the end of June, Sigritz said.

Sales and corporate income taxes also have fallen.

In Illinois, efforts to come up with a budget broke down completely, leaving the state with no plan to keep state agencies running or pay state workers. On Wednesday, Gov. Pat Quinn vetoed the plan approved by lawmakers, saying it left a $9.2 billion funding gap and "decimated the social fabric of Illinois."

Quinn may call lawmakers back into session before they are due to return on July 14. Legislators have said they may consider overriding Quinn's veto.

In other state budget developments from around the country:

— Connecticut Gov. Jodi Rell signed an executive order Tuesday that will keep the state government running without a budget in place. Rell and lawmakers are trying to reach an agreement that will close a gap estimated at about $8.8 billion.

— Aides to Pennsylvania Gov. Ed Rendell said little progress has been made between the governor and top legislators. Rendell said he didn't think an agreement would come soon. If an agreement isn't reached, the state faces the prospect of not being able to pay state employees, who will receive partial paychecks on July 17 and July 24. After that, there's no provision to pay them at all until the budget is in place. They would be paid retroactively.

Ten banks and credit unions have agreed to come to the rescue of 69,000 state employees by offering them low- or no-interest loans and lines of credit, Rendell said.

— In Ohio, lawmakers passed a temporary budget to get the state through the next week, but on Wednesday they were considering passing a seven-day measure to give them more time. It was the first temporary budget Ohio lawmakers have had to approve in 18 years.

— In North Carolina, legislators missed the midnight deadline for passing a new budget, but they approved a spending bill to keep the government operating temporarily. Gov. Beverly Perdue signed the bill, which will fund state agencies at 85 percent of current levels.

— Arizona lawmakers passed a budget with more than $600 million in cuts, rejecting a call form Gov. Jan Brewer for a temporary increase in the state's sales tax to stave off cuts to education, health care and other services.

Rather than vetoing the whole package, Brewer said she would line-item veto portions of the bill and recall lawmakers into session to craft an alternative plan to meet the state's education needs.

"I have carefully and selectively [chosen] to line-item veto portions of the legislation which allows me to add back funds for vital services and public safety so those critical programs are unaffected," she said.

Brewer and state lawmakers have been battling for weeks, after the Legislature passed the plan and failed to send it to her for fear of a veto. Brewer has said she wouldn't approve the plan, but it was not immediately clear whether she would make good on the threat. Arizona is among the states hardest hit by the home foreclosure crisis, leaving many municipalities facing shortfalls because of reduced property tax revenues.

— Indiana lawmakers passed a $27.8 billion, two-year budget Tuesday that was signed by Gov. Mitch Daniels less than four hours before the government would have shut down.

— Mississippi lawmakers approved most of the $6 billion budget, but they left the state's utility regulatory agency unfunded. The Public Service Commission said it didn't know how the agency would continue to function. Gov. Haley Barbour has said he can run the agency by executive order.

A report issued Monday by the Center on Budget and Policy Priorities, which researches and analyzes budget and tax policies, projected that the total shortfall for 2010 would be $166 billion in 48 states. The group said the gap will exceed $350 billion through 2011.

"State policymakers face an increasingly challenging battle against an economy that is still getting weaker," said Nicholas Johnson, director of the center's State Fiscal Project. "There is no letup in sight when it comes to making hard choices."

Contributing: Rachel Myrow of NPR member station KQED in San Francisco. Material from The Associated Press was also used in this report.