With California on the verge of issuing IOUs, Gov. Arnold Schwarzenegger moved to conserve cash Wednesday by ordering state workers to take a third day of unpaid furlough each month.

The executive order signed by Schwarzenegger will reinstate "Furlough Fridays," requiring more than 200,000 state workers to take unpaid leaves on the first three Fridays of each month.

The move amounts to an additional 4.62 percent pay cut for state workers, bringing their total reduction in 2009 to about 14 percent because of two furlough days imposed previously.

Schwarzenegger announced the new pay cut and other budget-balancing proposals one day after negotiations fizzled with the Legislature on more than a dozen bills designed to solve the state's massive budget hole.

Because state leaders failed to strike a deal before the fiscal year ended at midnight Tuesday, Schwarzenegger's Department of Finance estimates the shortfall has grown by about $2 billion - from $24.3 billion to $26.3 billion.

State Controller John Chiang has said he will begin issuing IOUs Thursday to vendors who do business with the state, local government, and people who are owed tax refunds.

Schwarzenegger blasted Democratic lawmakers Wednesday, saying they were more interested in protecting special interests and "kicking the can down the alley" than protecting taxpayers.

"At the end of the day, nothing was accomplished," Schwarzenegger said.

At his morning news conference, Schwarzenegger ordered lawmakers into special session to tackle the budget crisis and said he will not sign bills on any other subject until agreement is reached.

The third furlough day imposed on state workers, through June 2010, is expected to save $425 million. State hospitals, prisons and other 24-hour care facilities will maintain normal hours of operation, along with the California Highway Patrol and Cal Fire stations, the administration said.

Schwarzenegger lambasted lawmakers for scheduling an Assembly committee hearing for Wednesday, amid the state's budget crisis, on legislation to prohibit dairies from cutting cow tails.

"I think that's inexcusable," he said.

Schwarzenegger contends that Democrats have failed to address the entire multibillion-dollar state budget, preferring to piecemeal it, but Assembly Speaker Karen Bass and Senate President Pro Tem Darrell Steinberg strongly disagree.

The two Democratic leaders are pushing a proposal that they claim would solve the state's fiscal problem, without tax increases and without making what they consider devastating cuts sought by Schwarzenegger to the state's safety net.

The governor has proposed about $4 billion more in cuts than Democratic lawmakers, including elimination of the state's primary welfare program, CalWORKs, and the Healthy Families program that provides health insurance to more than 900,000 low-income children.

As an alternative to some of his deepest social service cuts, Schwarzenegger proposed a laundry list of cost-saving or efficiency measures, including lowering pension benefits for future state workers, cutting welfare grants by 5 percent, and additional anti-fraud measures for the the state's in-home supportive services program, including mandatory fingerprinting of all providers and recipients.

Recent days have been marked by tense negotiations. An attempt at compromise failed late Tuesday. It consisted of a three-bill package that would have averted the issuance of IOUs immediately, buying time for more negotiation, by saving about $3.3 billion in education funds and shifting redevelopment monies before the fiscal year expired at midnight.

Schwarzenegger said he would only sign a comprehensive agreement that solve the state's entire fiscal problem, not a portion of it.

Democratic leaders claim Schwarzenegger's failure to act on the three-bill package hurt taxpayers by sending the shortfall skyrocketing overnight.

Steinberg called the move a "monumental blunder" Tuesday, adding that it "may be the most irresponsible act I have seen in my 15 years of public service."

Bass echoed his frustration Wednesday in a written statement.

"This was totally unnecessary," Bass said.

Schwarzenegger suggested Wednesday that much of the money lost by failure to strike a deal before midnight could be recouped.

The governor proposed suspending Proposition 98 to save $3 billion in K-14 funding this fiscal year. The University of California and California State University systems have agreed not to close their books on the newly expired fiscal year until the end of July, which would allow the state to recoup $1.4 billion, he said.

The state's failure to cut education funding before midnight Tuesday creates a long-term obligation of more than $8 billion, however, because of Proposition 98 requirements pertaining to repayment of funding cuts stemming from a rocky state economy.

Because of ambiguity in Proposition 98, there was disagreement over whether schools would have been owed the money under proposals that needed to be acted upon before midnight Tuesday. Failure to do so ended the dispute, in favor of schools.

Schwarzenegger said he favored repaying the schools anyhow.

"I said the kids deserved the money back," he said. "The kids and the education community are smiling today."

Call Jim Sanders at (916) 326-5538.