UPDATE 4-California budget woes now 'fiscal emergency'

CASH CRISIS LOOMS

White House spokesman Robert Gibbs said the Obama administration is keeping a close eye on California's woes. State officials have proposed the U.S. government help with financial aid or by vouching for state debt. "We continue to watch the situation and we'll see as it develops," Gibbs said.

In Sacramento, California's capital, State Treasurer Bill Lockyer's office is preparing plans to issue short-term debt assuming Washington will not guarantee it.

"We've been operating since May under the assumption that there will be no help forthcoming," said Lockyer spokesman Tom Dresslar. "We did not ask for a bailout, repeat, we did not ask for a bailout. We wanted the federal government to step in and provide a backstop for our cash-flow borrowing."

Meanwhile, the lack of a budget may trigger action by Wall Street credit ratings agencies.

Fitch last week downgraded its rating on California's general obligation debt by one notch to A-minus, placing it four notches above speculative, or "junk" status, and making it the lowest rating of any U.S. state.

Fitch also warned of further downgrades, just as Standard & Poor's has warned of possible downgrades to California's general obligation debt. Moody's has said the state could see a multinotch downgrade of its A2 rating.

Moody's had no immediate comment on California's IOU plan or its failure to pass a budget. Fitch and S&P analysts were not immediately available to comment.

In Sacramento, tempers flared in the state Senate as the midnight start of the new fiscal year and IOUs neared.

"There is no excuse to hold this whole state hostage," state Senate President Pro Tem Darrell Steinberg told Republicans during a floor debate.

Senate Republican Leader Dennis Hollingsworth countered that major cuts are urgently needed. Otherwise, "there will be entire programs that will have to be lopped off," he said.

Due to its steep decline in revenue, California risks running out of cash later this month to pay all of its bills unless its books are balanced quickly. To conserve cash, State Controller John Chiang plans to issue IOUs by Thursday to state vendors, some local agencies and various recipients of state aid, including the elderly, disabled and college students.

Chiang plans to send $3.36 billion in IOUs this month to help make $10.9 billion in other payments, including money owed to investors holding California's debt. "The general obligation bonds will be paid," he told Reuters. "California has never defaulted on its debt obligation and we don't plan to do so."

California, which had the eighth largest economy in the world in 2006, according it its Legislative Analysts' Office, now needs to reassure Wall Street because state officials see the need to sell $7 billion to $9 billion of short-term debt once there is a budget agreement.

(Additional reporting by Marianne Russ in Sacramento, Lisa Lambert and Doug Palmer in Washington)) (For a package of Reuters stories on the budget crisis hitting U.S. states and cities, please double-click on: here)