California legislators, along with Governor Arnold Schwarzenegger, resumed work on Wednesday morning to avert the issuance of IOUs after a late-night session ended in gridlock.

This was seen as the last chance to defuse a budget deficit of more than 24 billion dollars.

Schwarzenegger is expected to lay out his plans in advance of Thursday's deadline, set by Controller John Chiang, for giving out IOUs in lieu of payments owed by the state.

Chiang, who acts as the state's banker, has to determine what interest rate the state will pay on the three billion dollars a month in IOUs it will begin issuing to contractors and some of California's neediest citizens, including the elderly, the disabled and the poor.

So far, no banks have formally committed to honoring the IOUs, said Chiang's spokeswoman, Hallye Jordan.

At least one financial institution, the Golden 1 Credit Union, said on Tuesday that it plans to accept the state's IOUs from its 710,000 members, some of whom are state contractors.

The governor and legislators can avert the IOUs if they reach a budget deal before they are issued on Thursday. But once they are issued, those who receive them will have to cash them with banks that may accept them or wait until the IOUs come due Oct. 1.

Republican state senators blocked a last-ditch effort Tuesday night to slice 3.3 billion dollars, mostly from education, a move that has made the budget shortfall larger.

Those proposed cuts, which were approved by the state Assembly last week on a bipartisan vote, were to have affected the fiscal year that ended on Tuesday. The opportunity to make the reductions expired at the stroke of midnight, after the package failed in a series of party-line votes, with one GOP senator abstaining, the Los Angeles Times reported on Wednesday.

Schwarzenegger had promised to veto the bills unless they were accompanied by a complete plan to balance the budget. It was reported that Republican lawmakers had taken their direction from Schwarzenegger in voting it down.

Officials said the failure to make the cuts means the state will now owe several billion dollars more to schools in the coming fiscal year because the state's complex education financing formula is based on the previous year's appropriation.

Thousands of state workers, whom the governor has targeted for a third unpaid day off every month, were preparing to show up outside the state Capitol later in the day to protest those plans and the proposed budget cuts, according to the Service Employees International Union, which represents the state workers.

A state appeals court panel clouded the budget picture further on Tuesday with a ruling that could cost the state nearly 3.5 billion dollars, according to the Los Angeles Times.

The judges in the 3rd District Court of Appeal said that since 2007, gasoline-tax funds intended for mass transportation had been improperly diverted by the governor and lawmakers to cover other expenses. The state will appeal to the California Supreme Court, said H.D. Palmer, a spokesman for the Department of Finance.

California last issued IOUs in 1992. Doing so again could have serious repercussions. According to Treasurer Bill Lockyer, the decline in the state's credit rating that is likely to follow IOUs-- as it did 17 years ago -- would cost the state 3.4 billion dollars in higher interest rates over 30 years, adjusted for inflation.

Wall Street rating agencies have already warned that they are weighing downgrades to the state's credit, which would probably take years to recover, Lockyer's aides said.

Source: Xinhua