Jordan Rau and Evan Halper
Los Angeles Times
January 9, 2009

State officials on Tuesday braced for the possibility of delaying tax refunds to millions of Californians, along with student grants and payments to vendors, as the latest round of budget negotiations between Gov. Arnold Schwarzenegger and Democratic legislators collapsed.

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With little more than a month’s worth of cash left in the state treasury, the governor and lawmakers have been unable to agree on how to erase a budget gap projected to reach $41.6 billion by the middle of next year. Democrats announced Tuesday that two weeks of discussions had ended in an impasse and sent Schwarzenegger the $18-billion fiscal package they passed last month. The governor vetoed it, as he had promised to do.

State Controller John Chiang has said that as early as Feb. 1, his office may begin issuing promissory notes if lawmakers have not resolved the budget crisis. The state has done this only once before since the Great Depression — in 1992.

“We have not made any decision about deferring payments or using IOUs, but they are possibilities if the governor and Legislature don’t come to some agreement soon,” Chiang spokeswoman Hallye Jordan said Tuesday.

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