UPDATE 3-California turns to 'IOUs' amid budget impasse

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By Jim Christie

SAN FRANCISCO, July 2 (Reuters) - As California marked its second day of a new fiscal year without a budget agreement, the state government moved ahead on Thursday to issue billions of dollars in "IOUs" in order to avoid a cash crisis.

California faces a financial stranglehold after lawmakers failed to balance the budget by the start of the state's new fiscal year on Wednesday, leaving a $26.3 billion deficit.

Governor Arnold Schwarzenegger, a Republican who declared a fiscal emergency to force lawmakers to tackle the financial crisis, minced no words on Thursday in lambasting lawmakers for their failure.

"In four weeks, in the last four weeks, instead of negotiating and coming to a budget agreement, they decided to debate and to debate and to have hearings and more debates and more hearings and finger-pointing and assigning blame. At the end of the day, they haven't accomplished anything," Schwarzenegger said at a press conference in Los Angeles.

Senate President Pro Tem Darrell Steinberg said state leaders need to cool their heated rhetoric of recent days and that he would work with other top lawmakers over the weekend to narrow differences over balancing the budget.

Democrats who control the legislature cannot pass a budget on their own. They agree with Republicans that deep spending cuts are needed but want some taxes increased. Republicans are holding firm against tax increases and Schwarzenegger has sided with them.

"In my view we're making significant progress," Steinberg told reporters in the state capital of Sacramento. "It's time that we get this done."

California's finances have been battered by the recession, rising unemployment -- which hit 11.5 percent in May -- and the lengthy housing downturn.

NO CHECKS IN THE MAIL

Under California's plan to issue IOUs in lieu of paying some bills immediately, finance officials in Sacramento approved paying interest on the IOUs at a rate of 3.75 percent.

Controller John Chiang plans to issue $3.36 billion in IOUs this month so the state has cash for $10.9 billion for priority payments, including money owed to investors holding state debt.

"IOUs are a sign that the state is being fiscally mismanaged," Chiang said. "That clearly creates implications for further downgrades of California credit ratings."

The state agreed to redeem the IOUs, technically registered warrants, beginning on Oct. 2.

The first tranche of IOUs will go mainly to taxpayers who are owed tax refunds. "We anticipate printing about 28,742 registered warrants today worth about $53.3 million," said Chiang spokesman Jacob Roper.