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.

Senate President Pro Tem Darrell Steinberg said Schwarzenegger's veto threat against a stopgap package to cut the 2008-09 education budget and delay IOUs "may be the most irresponsible act I have seen in my 15 years of public service. And for what? It's a monumental blunder."

But Schwarzenegger said Democrats instead were to blame for failing to compromise with him on a plan to solve the entire $24 billion deficit with enough spending cuts and permanent program reductions.

"The Legislature's latest proposal is no different than what Sacramento has been doing for the past two decades – kicking the can down the alley," McLear said in a written statement.

Absent a significant budget deal today, state Controller John Chiang has warned he must take the next step of issuing IOUs on Thursday to vendors who do business with the state, local governments and people who are owed tax refunds. Chiang said IOUs are necessary to preserve enough cash to meet constitutionally mandated obligations to schools and state bondholders in July.

Hallye Jordan, a Chiang spokeswoman, said the first batch to go out would consist of 28,742 IOUs, worth a total of $53.3 million, to taxpayers awaiting refunds.

Schwarzenegger also plans to sign an executive order today forcing more than 200,000 state workers to begin taking a third furlough day each month, essentially cutting their pay by an additional 4.6 percent, according to McLear. The governor has framed the move as a way to save cash.

The state has issued IOUs – formally called registered warrants – only once since the Great Depression. That was in 1992, when about 1.6 million, worth a total of $3.8 billion, were issued over a two-month period because of a budget impasse.

Democratic leaders and Schwarzenegger remained at odds Tuesday over how much spending California should cut to balance its budget. Democrats proposed cuts of $12 billion, while Schwarzenegger has asked for $16 billion.

The governor in May proposed wholesale eliminations of welfare-to-work, Healthy Families and Cal Grants, but he has since suggested he would retain those programs as long as Democrats moved closer to his $16 billion number. He suggested last weekend that they make permanent changes that save money by limiting eligibility and placing a stricter burden on recipients to prove they qualify for services.

Steinberg and Assembly Speaker Karen Bass said Tuesday that the governor is insisting on cuts that would devastate the state's safety net for vulnerable Californians.

"The price is too high, especially when there are other options," Steinberg said.

Democrats initially sought roughly $2 billion in taxes on tobacco and oil drilling, but they abandoned those hikes in a majority-vote plan they approved in the Senate late Tuesday. Schwarzenegger vetoed a different set of majority-vote budget bills Tuesday, and he said he would do the same to any plan that lacks bipartisan support.

Call Kevin Yamamura, Bee Capitol Bureau, (916) 326-5548.