Talks Intensify Over Closing Calif.'s $26B Deficit

Aurora Muniz, of CB Enterprises, uses a forklift to move stacks of food stuffs for shipment to the...

Aurora Muniz, of CB Enterprises, uses a forklift to move stacks of food stuffs for shipment to the Preston Youth Correctional Facility, at a warehouse in Ceres, Calif., Friday, July 10, 2009. CB Enterprises provides 35 state prisons,hospitals and schools with nearly $12 million worth of food stuffs and dry goods each year. Owner Christian Bartels is counting on his regional lender to honor the state issued IOUs or give him a loan to see him through the state's cash shortage. (AP Photo/Rich Pedroncelli)

(AP)

The unprecedented drop in tax revenue is forcing Schwarzenegger and lawmakers to make difficult choices, with deep cuts proposed to education, health and social service programs.

At the same time, Schwarzenegger and Republican lawmakers are standing fast against additional tax increases, limiting lawmakers' options for closing the deficit.

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The two-year budget package approved in February increased sales, personal income and vehicle license taxes, and Republicans say the state's economy cannot absorb additional tax hikes.

While the governor and lawmakers try to reach a compromise, some of the state contractors who are being issued IOUs will have to start scrambling to find banks that will cash the warrants. Bank of America Corp. and other major banks said Friday was the last day they would honor the IOUs, which cannot be redeemed until Oct. 2.

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