California lawmakers reject budget bills

SACRAMENTO, California (Reuters) - Democrats and Republicans in California's legislature rejected rival budget plans on Tuesday on the last day of their regular session, leaving the government of the most populous U.S. state without an official spending plan in place.

There was little sign that the two parties, warring over opposing plans to slash spending or raise taxes to close a $19 billion shortfall, will be able to reach agreement any time soon to muster the two-thirds vote needed to pass a budget bill.

Some analysts expect the state's leaders to break their record for a late budget -- perhaps even with a spending plan approved only after the November election as Democrats and Republicans use a budget impasse to rally their respective partisans.

Thornburg Investment Management portfolio manager George Strickland said he sees the budget impasse pressing on well into October because of hard feelings among lawmakers: "They're not looking for a compromise."

Lawmakers were supposed to have agreed to a budget plan in mid-June and had one in place for the July 1 start of California's current fiscal year.

The record for a late budget was set in 2008 when the legislature finally passed a plan on September 16, which was signed into law a few days later by Republican Governor Arnold Schwarzenegger.

Schwarzenegger wants to close the budget shortfall largely by slashing spending, a plan backed by Republicans in the legislature's minority. Democrats who control the legislature want tax increases so as to not have to cut spending too deep.

Another complicating factor this year is that Schwarzenegger has said he will not accept a budget agreement unless it provides for changes to the state's pension system to cut its costs.

Instead, both sides have been trading barbs at each other's budget plans without engaging in substantive talks.

Lawmakers on Tuesday continued to trade barbs.

Republican state Senator Tony Strickland, for instance, charged that "Democrats in Sacramento continue to treat Californians like a personal ATM machine for their over-spending."

Democratic Assemblyman Charles Calderon said Republican leaders are the "killers of hope and prosperity, killers of compassion, understanding and unity, killers of the soul."

Schwarzenegger spokesman Aaron McLear said that without a budget, California is fast approaching the point where it will have to issue IOUs to vendors and others counting on state money in order to preserve as much a cash as possible for priority payments.

"It's frustrating," said McLear. "Everyday they continue to fail to do their job it gets more difficult."

Among California's priority payments are checks for investors holding the state's debt.

Last week state leaders told local officials that $3 billion in money for local governments would be held back until the budget stalemate is overcome. The money will help cover key payments, including $803 million in general obligation debt service on October 1.

Schwarzenegger likely will call a special session of the legislature focused on the budget impasse, which has yet to concern the municipal debt market.

As long as California pays bondholders, concern about the state's lack of a budget will be held in check, said Bill Mullally, president Alamo Capital in Walnut Creek, California.

Investors have grown accustomed to exhausting and long budget battles in California, the biggest issuer of municipal debt, added Alexander Anderson Jr, portfolio manager at Envision Capital Management in Los Angeles: "These things have taken a long time to figure out."

(Reporting by Marianne Russ in Sacramento; Writing by Jim Christie; Editing by Leslie Adler)