Pennsylvania withholds July pay

NEW YORK (CNNMoney.com) -- Pennsylvania state workers' paychecks are a little light these days.

Struggling to resolve a 20-day-old budget impasse, Pennsylvania is withholding pay for 69,000 state employees for time worked after July 1. Workers Friday received only 70% of their salary, covering days worked in June. Starting two weeks from now, they'll get nothing on payday until a state budget is approved.

Pennsylvania is one of three states that have yet to pass budgets for fiscal 2010, which began July 1. The other two -- Connecticut and North Carolina -- are operating under temporary spending measures. Still two others, Illinois and Ohio, approved their 2010 budgets this week.

In California, which passed a budget in February, Gov. Arnold Schwarzenegger and lawmakers are moving closer to resolving a $26 billion budget shortfall that has forced the state to send out nearly 150,000 IOUs to residents, contractors and small businesses.

When Pennsylvania state workers open their paychecks, they'll see the words "Budget Impasse Leave without Pay" for the time worked in July. Even after a budget is signed, employees won't see the money for several days. And they won't get interest on the money owed, said a governor's spokeswoman.

Some 29 financial institutions, primarily credit unions, are offering workers no-interest or low-interest loans. Several food banks are also providing emergency supplies to employees in need. They can also check with the state to see if they are temporarily eligible for food stamps or welfare.

Republicans and Democrats are battling over how to close a $2 billion budget gap. The former don't want to raise taxes, while the latter don't want to cut too deeply into state services.

Lawmakers may take up the budget issue soon if the House passes its version Friday. It would then have to pass muster with the governor.

Meanwhile, California residents are still reeling from their state's budget stalemate. The impasse has affected residents, businesses and the state's credit rating.

Controller John Chiang has issued 147,000 IOUs totaling $662 million since July 2 in an effort to close a nearly $3 billion cash shortfall for the month. They are going to county social service agencies, those owed state income tax refunds and state vendors. Holders won't get the funds until the budget is passed or until Oct. 2, whichever comes first. They will receive an interest rate of 3.75%.

Several dozen credit unions are accepting the IOUs, and Citibank said Friday it will do so until July 24. But Wells Fargo, Bank of America and JPMorgan Chase, stopped taking the paper after July 10. This has left some residents struggling.

Donna Webb, who supplies books to state prisons, has received four IOUs totaling $33,000 and is waiting to receive another batch for $27,000. The Exeter, Calif., small business owner deposited nearly all the funds in her Bank of America account before it stopped accepting the paper, but she had to wait two weeks to access the money since the bank isn't crediting IOUs as it does standard checks.

Her suppliers, however, aren't cutting her a break. Already, one has lowered her credit limit because she was late with a payment.

"My company which I started a year ago may not survive this crisis," said Webb, whose business is called The BookLady. "I still have to pay my creditors for the products ordered [and] they are not inclined nor obligated to accept an IOU from me."

At the same time, many non-emergency state agencies shut down Friday for the second "furlough Friday" this month.

Schwarzenegger added a third monthly furlough day on July 1 when he declared a state of emergency. These divisions will be closed the first, second and third Friday of every month, starting July 10.

The governor and lawmakers have said this week that they are close to a budget deal, though education funding remained a sticking point.

The impasse is growing more costly to California as its financial situation grows more precarious. Earlier this week, Moody's downgraded the state's credit rating to three notches above junk status, following a similar move by Fitch Rating, which put it two notches above.

The state treasurer warned Thursday that such downgrades limit California's ability to borrow money. If the Golden State's rating does fall into junk territory, it could be a disaster, said Treasurer Bill Lockyer.

"If the governor and legislature dump us on that [junk] pile, they will end indefinitely the state's financial ability to build schools, highways, levees -- all the critical public works we need to rebuild California," he said. "If we're denied the ability to sell bonds, financing for infrastructure projects will cease. It won't slow. It will stop. Many thousands of California workers will lose their jobs. Thousands of businesses will lose billions of dollars in revenue."

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