California's budget problems evolved into a game of political chicken Thursday, as Gov. Arnold Schwarzenegger and GOP state senators took an all-or-nothing stance that could lead to issuing IOUs to pay the state's bills.

On highly unusual bipartisan votes, the Assembly overwhelmingly passed three bills that would free up cash for the fiscal year that starts Wednesday, by cutting school spending and delaying some payments to schools, colleges and local governments.

But the bills sank in the Senate in the face of united opposition by Republican senators and the governor – despite the fact that the measures were part of the budget-balancing plan Schwarzenegger proposed last month.

The result was another wasted day in the quest to erase a $24 billion budget deficit before next Wednesday.

State Controller John Chiang has warned that without a balanced budget in place by then, he will begin using IOUs to pay most of the state's bills.

Chiang says the action will be necessary so he can save enough of the state's dwindling cash supply to make constitutionally mandated payments to schools and state bondholders.

Thursday's trio of bills would have freed up an additional $4 billion to $5 billion in cash that Assembly Budget Chairwoman Noreen Evans, D-Santa Rosa, said could fend off the need for IOUs through August.

The governor included similar proposals in his own budget plans. But Thursday he and GOP senators made it clear they would rather see the state issue IOUs for just the second time since the Great Depression than agree to what they characterized as a piecemeal approach to the entire deficit.

"Since the first day we began working to solve this $24 billion deficit, I have been clear: the Legislature must solve the entire deficit, must make the hard decisions now, and must not ask California taxpayers to foot the bill," the governor said in a prepared statement.

"The current proposal in the Legislature amounts to nothing more than a piecemeal proposal and a second day of drills and, if passed, I will veto it because it doesn't solve the problem."

After the Assembly passed all three bills – and after meeting privately with Schwarzenegger – Republican senators trooped back to the Senate chambers, where all but one of them voted against the measures.

Sen. Abel Maldonado, R-Santa Maria, didn't vote either way, and several Democratic senators also laid off one or more of the bills.

"We're tired of partial solutions," said Sen. Dave Cox, R-Fair Oaks. "This bus is over the cliff. Let me say to my colleagues on the other side of the aisle: You're driving."

Senate President Pro Tem Darrell Steinberg, D-Sacramento, pointed out that if Republicans had backed a bill offered Wednesday that would have made $11 billion in cuts, and the three bills Thursday, lawmakers would be two-thirds of the way toward closing the budget gap.

Republicans in both houses rejected the cuts bill Wednesday on the grounds that the cuts didn't go deep enough.

After Thursday's bills went down, Steinberg accused the governor of "playing, frankly, a very reckless game."

"It's obvious this was a coordinated effort," Steinberg said. "I don't believe the governor wants his legacy to be that he had the opportunity to avoid IOUs for Californians and that he failed to take it because he wanted to play a game of chicken.

"We're not playing. … I think it is time the governor and the Senate Republicans end this sort of machismo game-playing. There's too much at stake for people."

Chiang and state Treasurer Bill Lockyer also called on Schwarzenegger to support the bills as the best way to head off IOUs.

"It's true the measures before the Legislature do not solve the entire problem," they said in a joint statement. "But they do solve our most urgent problem. … Quick approval of these payment deferrals and reductions will provide sufficient cash to avoid issuing IOUs starting July 2."

But Matt David, Schwarzenegger's communications director, countered that the governor would veto the three-bill package even if that proves to be the only way to avoid IOUs next week.

David said the governor was willing to risk losing the ability to save $3 billion by making a cut in school spending for the current fiscal year – if the package is signed into law before Wednesday. Most of the money would be replaced with federal stimulus funds.

"The governor's decision to veto this stopgap is a fiscally responsible approach," David said. "We need a solution that solves the problem. Five billion dollars does not solve the problem, it only kicks the can down the alley and makes the problem more difficult."

The partisan nastiness among senators and the governor was in deep contrast to the comity exhibited in the Assembly.

"I am heartened that Republicans and Democrats are working collegially, conscientiously and professionally to devise solutions to this difficult problem," said Assembly GOP leader Sam Blakeslee of San Luis Obispo, as the house put up votes of 69-0, 54-0 and 68-0. "It's an important first step."

Two of the bills would defer payments that are due to all levels of the public education system, and cities and counties for road repair, early in the coming fiscal year.

The third bill rewords a measure that legislators passed earlier this year, which would transfer money from regional redevelopment agencies to the state. A judge struck down the original version because the money might not be spent within the redevelopment agencies' areas. The new version would require that the funds be used in school districts that at least partially overlap the redevelopment areas.

State officials got more bad news Thursday when Fitch Ratings, a bond rating agency, announced it was downgrading California's credit rating another notch.

The drop in what is already the nation's lowest bond rating could cost millions more in higher interest rates on state bonds.

Call Steve Wiegand, Bee Capitol Bureau, (916) 321-1076.