Legislators in more than a half-dozen states, their revenues evaporating in the recession, frantically worked to stave off government shutdowns and devastating service cuts. California failed to meet a midnight deadline and now may need to issue IOUs instead of paying bills.
Across the country, lawmakers were feeling the heat as their legislatures began the new fiscal year without a budget in place.
In Illinois, the sputtering drive to come up with a state budget broke down completely Tuesday, leaving the state without any plan for paying its employees or delivering government services.
The session ended without any firm plans to return or even for Gov. Pat Quinn and legislative leaders to resume negotiations.
In Pennsylvania, talks between Gov. Ed Rendell and top legislators ended Tuesday night with no substantial progress, aides said. Rendell said he didn't think an agreement would come soon. The state faces the prospect of not being able to pay state employees if they cannot resolve an impasse.
The end of June marked the end of the fiscal year in many states, meaning lawmakers worked late Tuesday to pass budgets in a year that has seen the recession take a devastating toll on government finances.
Fallout from California's budget mess threatened to spread nationwide because of the sheer size of the state's economy. The Senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts that had to be enacted before Wednesday.
Senate President Pro Tem Darrell Steinberg, a Democrat, called Republicans' refusal to vote for the measures "an irresponsible position to take." At least two Republican votes were needed to put together the two-thirds majorities required to approve the legislation, which passed the Assembly last week with bipartisan support.
Arizona, Indiana, Ohio, Connecticut and Mississippi also were among the other states that raced against the clock to pass budgets -- and avoid crippling consequences.
Faced with a budget stalemate, the Ohio House voted in favor of a seven-day spending plan that will allow the state to keep operating while budget talks continue, the first temporary budget Ohio has been forced to approve in 18 years.
Indiana narrowly averted a large-scale government shutdown after coming to terms on a budget.
Mississippi lawmakers approved most of the $6 billion budget, but left one agency -- the state's utility regulatory agency -- unfunded. The Public Service Commission said it didn't know how the agency would continue to function, but Gov. Haley Barbour has said he can run the agency by executive order.
In Connecticut, Gov. M. Jodi Rell signed an executive order to keep the government running without a two-year budget in place. While she contends the average taxpayer won't notice any change, municipal officials fear delays in state grants that fund everything from road repairs to education.
In the wee hours Wednesday, the Arizona Legislature completed action on budget bills to implement most of a compromise $8.4 billion budget negotiated with Gov. Jan Brewer. Lawmakers omitted a sales tax increase that Brewer wanted, and her spokesman declined to say if she would sign the bills.
In Pennsylvania, state workers will receive only partial pay on July 17 and July 24, after which paychecks will be withheld entirely until the impasse is solved. They will then be paid retroactively.
Rendell said 10 banks and credit unions have agreed to help 69,000 state employees by offering them low- or no-interest loans and lines of credit.
In most states, the debate centers around whether states should be raising taxes to bridge the budget gaps. California Gov. Arnold Schwarzenegger said he wouldn't sign anything that raised taxes or fees beyond what he has already proposed.
"They should forget about that," the Republican governor said, accusing Democrats of going through a "song and dance. Let's get to work, fix it."
State Controller John Chiang has said he would have to start issuing the IOUs on Thursday unless lawmakers took steps to stem the state's red ink by then.
Roughly $3 billion worth of IOUs will be issued in July unless a compromise on closing the deficit is reached quickly. They will be sent to state contractors, college students, welfare recipients, low-income seniors, the disabled and others who depend on or deliver state services. Counties will not get paid for social programs they administer.