California Legislature rejects $11 billion in cuts

By Marianne Russ

SACRAMENTO (Reuters) - The California Legislature on Wednesday voted down $11 billion in cuts to state services, sending members back to the drawing board as they grapple with a $24 billion budget gap.

The proposal failed largely along party lines in both the Assembly and state Senate, as expected, with Republicans saying it fell far short of the savings needed and amounted to posturing by Democrats.

Controller John Chiang said earlier on Wednesday that he will have to begin issuing IOUs next week if the gridlocked Legislature and Governor Arnold Schwarzenegger cannot agree on a budget.

"This is June the 24th and this is serious business, and if (the Republicans) position is that they do not want the state to go into IOUs then we need to see how they would make up the magic number of 24 billion," Senate Democratic leader Darrell Steinberg said.

"If this is some sort of a thing to see whether or not we will blink ... you can't see them but I actually have toothpicks holding my eyes open," he said.

But Republican leader Dennis Hollingsworth called for both sides to get back to the bargaining table.

"We think that we need to get back to work, solve the entire problem and we need to do that very quickly before we run out of money," he said.

Hollingsworth also called on Democrats to agree to much deeper cuts that were proposed by Schwarzenegger.

"All of the cuts that were rejected by the majority party that the governor proposed are things that unfortunately have to be done," he said. "We can't afford some of those things when we're talking about revenues that are back to where we were in 1999 or 2000.

Moody's Investors Service has warned that California could face a "multi-notch" downgrade in its credit rating, citing the state's expected massive shortfall for fiscal 2010 of more than 20 percent of its general fund budget and limited options for plugging it.

Schwarzenegger and lawmakers face the task of closing a $24.3 billion budget deficit for the state's fiscal year beginning on July 1.

The gap was opened by the state's most severe drop in revenues since the Great Depression, including a steep decline in personal income taxes and sagging retail activity as consumers reined in spending, and the long-running downturn in housing.

Rising joblessness is also weighing on the state. Its unemployment rate jumped to 11.5 percent in May from 6.8 percent a year earlier.

(Writing by Dan Whitcomb; Editing by Diane Craft)