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California's budget crisis deepens after lawmakers miss deadline

California is on the brink of issuing IOUs and state workers will take a third unpaid furlough day in July after Gov. Arnold Schwarzenegger and state lawmakers failed to strike a budget compromise late Tuesday.

By allowing the fiscal year to end without trimming $3.3 billion from the 2008-09 education budget, lawmakers and Schwarzenegger lost the chance to cut spending in a manner considered crucial to bridging the $24 billion deficit.

Instead, Senate Republicans, Democrats and the GOP governor remained in a political standoff over other parts of the budget, particularly how much to slash health and welfare programs.

Without the education cut, state leaders face a more difficult challenge because they must find billions in new solutions after virtually exhausting their bag of budget tricks over the past year.

Tuesday's failure to cut education spending and shift redevelopment funds expanded the deficit overnight because of the way school funding formulas are calculated.

Schwarzenegger plans to declare a new state of fiscal emergency today, launch another special session and propose additional program cuts to solve the larger deficit problem, spokesman Aaron McLear said. The new deficit number will be roughly $26.3 billion, about $2 billion higher than the governor's May budget, according to Schwarzenegger's Department of Finance.

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