SAN FRANCISCO - With the impasse continuing over proposals to balance the current California budget, Gov. Arnold Schwarzenegger's administration released his proposal for the next budget year Wednesday, almost two weeks early.

Normally, the governor releases a budget proposal on Jan. 10, a date specified in the state constitution.

"We are facing a major crisis, probably the most challenging budget situation the state has ever faced, and the governor believes in acting immediately," the governor's finance director, Mike Genest, said.

California, which has been unable to put together a structurally balanced budget even in good economic times, has been caught short by the current recession, with finance officials chasing continually shrinking revenue projections.

The Department of Finance now estimates that the state faces a $41.6 billion shortfall for the combination of the current 2008-2009 fiscal year and the 2009-2010 fiscal year.

The department projects $87.5 billion in general fund revenues in the current fiscal year, absent any changes.

In December, the governor called a special session of the Legislature and proposed a combination of tax increases and spending cuts to begin closing the gap.

"Most of this has to be done right away," Genest said. "If it's not done right away, the value of these things erodes dramatically, which means we would have to have deeper cuts the next year."

Budget balance proposals stalled last month as Republicans refused to back tax increases, which require a two-thirds vote and therefore some buy-in from the GOP minority.

Democrats responded with a proposal they said would generate $9.3 billion in new tax revenues with a majority vote, by reclassifying a number of taxes and fees.

Schwarzenegger said he wouldn't sign that plan, only because he disagreed with the details, rather than the idea of approving revenues with a simple majority vote, which would be sure to draw legal challenges if adopted.

Genest said Schwarzenegger's budget proposal would provide the state with enough cash to retire $5 billion in revenue anticipation notes the state issued in October.

But he said California would have to raise cash by issuing about "five billion-ish" of new revenue anticipation warrants in July that would not be retired until June 2011.

"You would never propose in essence to roll forward part of this year's budget into the next if you had an alternative," Genest said, adding that he doesn't have one.

Because the state's liquidity is so tight, the controller's office this week asked agencies to begin implementing plans to issue IOUs as soon as Feb. 1.

The state is within 60 days of being unable to meet all the obligations in its current budget, Controller John Chiang said in a letter to agencies Tuesday. The state would issue IOUs to some payees to reserve cash for debt service and education payments that have priority.

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