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California lawmakers debate budget through night

SACRAMENTO (Reuters) - California entered its 100th day without a state budget in place on Friday as lawmakers continued debating a legislative package that was to make up the spending plan agreed upon in principle with Governor Arnold Schwarzenegger last week.

The state Assembly on Thursday passed the package's main budget bill and was working on related legislation early on Friday. The state Senate had not passed the main budget bill.

The legislators had been expected to approve the state budget late on Thursday but debate bogged down on details of the spending cuts and creative accounting needed to fill a $19.1 billion deficit, 100 days after the June 30 deadline for a spending plan to have been put in place.

Even after the budget passes, critics fear the governor to be elected on November 2 will immediately face a new shortfall as rosy assumptions about revenue prove unfounded.

That's an old story for the largest U.S. economy, which has seen its revenue plunge in recent years due to recession and turmoil in financial and housing markets.

When it finally passes, Schwarzenegger must still sign the budget, which may avert the embarrassment of California resorting to IOUs later this month.

Contractors last year were given promissory notes during a lengthy budget impasse while investors holding state bonds were paid on time, following state Constitution guidelines.

Additionally, State Treasurer Bill Lockyer needs an enacted budget to move forward with plans for issuing billions of dollars in short-term debt to raise money for the state government's cash-flow needs.

How municipal debt investors respond to the planned sales of the debt, called revenue anticipation notes, depends on the extent of financial gimmicks in the budget, said Marilyn Cohen, president of Envision Capital Management of Los Angeles.

California, the biggest issuer of U.S. municipal bonds, has a long history of late budgets that include provisions that raise the eyebrows of public finance analysts.

"Investors want to see something substantive," Cohen said.

Democrat Jerry Brown, the state's attorney general and a former governor, and Republican Meg Whitman, the former chief executive of eBay Inc, aim to succeed Schwarzenegger, who cannot run for governor again because of term limits.

(Reporting by Jim Christie; editing by Todd Eastham)