SAN FRANCISCO - As California gets closer to the half-billion-dollar mark in outstanding IOUs, the state's leading budget negotiators resumed communications over the weekend, though hours of meetings left more to be resolved.

The budget deal is needed to resolve a general fund deficit that is projected to exceed $25 billion for the fiscal year that began July 1, as well as to alleviate a cash shortfall so acute that the state controller's office is paying some creditors with IOUs in order to preserve cash for other creditors with higher legal priority, such as bondholders.

The state began issuing the IOUs, formally known as registered warrants, on July 2, and through Friday had issued almost 130,000, for more than $435 million, according to Hallye Jordan, spokeswoman for Controller John Chiang.

In what is usually a sign of progress by California standards, budget negotiations moved into back-room meetings through the weekend, as Gov. Arnold Schwarzenegger met through Sunday with the top two party leaders from each branch of the Legislature, in so-called Big Five meetings.

Assembly Speaker Karen Bass, D-Los Angeles, who very publicly skipped a Big Five meeting last week, was at the table over the weekend and made guardedly optimistic comments to the Sacramento press corps after the Sunday meeting concluded.

"What's most important is that the talks haven't broken down," she said. "I think we have several more days at it but I feel good that we are working our way through the issues."

Assembly Minority Leader Sam Blakeslee, R-San Luis Obispo, also noted that a lot of work lay ahead this week, including the thorny issue of the state's education funding formula, which takes up the largest percentage of the budget.

No Big Five meeting was scheduled yesterday. The other members of the group are Democratic Senate president pro tempore Darrell Steinberg and Republican minority leader Dennis Hollingsworth.

Budget negotiations often revert to the Big Five because California's two-thirds budget vote requirements necessitate buy-in from both parties, even though Democrats have solid majorities in both chambers.

"They know that's the only way you get anything done," said Barbara O'Connor, a professor of political communications at California State University, Sacramento. She predicted that a budget will be put to a vote by Friday.

Not coincidentally, Saturday marks the start of the Legislature's scheduled four-month summer recess, but only if the budget is squared away.

Last week's apparent delays in negotiations primarily served to give staff time to put together the most accurate numbers possible, O'Connor said, particularly in relation to the state's convoluted education funding formula.

They negotiators need to be working from the same page because all parties are aware of the state's need to make a cash-flow borrowing as soon as possible after a budget is enacted, according to O'Connor.

"It's critical that all parties buy off on the assumptions and numbers so they can get to the markets quickly," she said.

Chiang put an exclamation point on the state's budget problem late Friday, when he issued his monthly cash report closing out fiscal 2009.

The report said California spent more than $10 billion from its general fund than came in during the fiscal year, which ended June 30. In other words, there was $98.2 billion in general fund spending, but only $87.8 billion in general fund receipts.

In fiscal 2008, by comparison, California recorded $103.4 billion in general fund receipts, so the year-over-year decline was about 15%.

The controller's office is on pace to issue $2.87 billion in registered warrants this month. Several of the state's largest bank operations have stopped accepting the IOUs for deposit.

Chiang, in the report, said the state could function through September by issuing IOUs, but by October, absent corrective action, it will be short of cash for all the legally protected groups of creditors that currently are paid with cash.

Against this backdrop, as of the market's close Friday, California general obligation bonds were trading between 102 and 182 basis point above the triple-A GO curve, according to Municipal Market Data, with the widest spreads in 2014 to 2017 maturities. A year earlier, the widest spread was 51 basis points, with the high spreads in the longest maturities.

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