20090701 california schwarzenegger 18
California Gov. Arnold Schwarzenegger speaks on the status of the state budget at the California Center for the Arts in Escondido, Calif. - 


STEVE CHIOTAKIS: California lawmakers worked into the night but failed to balance the state budget before today's start of the new fiscal year. That means IOU's could be issued in lieu of payments for the first time in nearly two decades. The latest from Marketplace's Sam Eaton.

SAM EATON: Unless lawmakers agree to new cuts in a special emergency session today, California could begin issuing more than $3 billion in IOU's as soon as Thursday. Contractors and local agencies serving the elderly, disabled and poor would be the main recipients. The move is a last-ditch effort by the state to avoid running out of cash entirely by the end of this month.

California's budget shortfall has swelled to nearly $25 billion as the state suffers the worst drop in income tax revenues since the Great Depression. Governor Arnold Schwarzenegger and Republican lawmakers have ruled out tax increases as a way to close the gap.

The state's economy is the world's eighth largest, accounting for 12 percent of the nation's Gross Domestic Product. Experts say if California stumbles, the recession plaguing the national economy could be prolonged.

In Los Angeles, I'm Sam Eaton for Marketplace.

Follow Sam Eaton at @eatonsam