BUDGET MESS MAKES CALIFORNIA VULNERABLE TO CRIPPLING CREDIT DOWNGRADE, OFFICIAL WARNS: Treasurer Bill Lockyer says the state could find funding sources for crucial programs cut off if its credit rating is dropped to junk status. Lawmakers and the governor vow to keep negotiating.

By Evan Halper and Eric Bailey | From the Los Angeles Times

2:50 PM PDT, July 16, 2009 -- Reporting from Sacramento — State Treasurer Bill Lockyer warned today that state leaders' failure to reach a budget deal has put California at risk of a credit downgrade that would cut off access to funds needed for building schools, roads and other public works projects.

"With every passing day, the state's credit rating moves closer and closer to the junk pile," Lockyer said in a prepared statement. "If our credit rating sinks to junk status, the state will find the door to the infrastructure bond market locked shut."

The warning came as budget negotiations remained stuck amid simmering frustrations, although legislative leaders and Gov. Arnold Schwarzenegger vowed to forge ahead in hopes of settling on a package to close California's $26.3-billion deficit.

Speaking at a midday news conference, Schwarzenegger characterized the state of negotiations, which halted Wednesday night.

"It wasn't a breakdown," he said, "but I think a stall. . . because some new issues came up."

No time has been set to resume talks, though Assembly Speaker Karen Bass (D-Los Angeles) said more bargaining sessions would take place. And the Legislature has postponed its summer recess, scheduled to begin Friday, pending a budget agreement.

"The legislative leaders plan on working through the weekend, and we hope to get a deal soon," said Jim Evans, a spokesman for Senate leader Darrell Steinberg (D-Sacramento).

The prime obstacles to an accord are in the areas of education and welfare. One major sticking point is how to tweak voter-approved school-funding guarantees so the state can cut billions of dollars it needs to balance its books -- while still guaranteeing that school funding will be restored when the economy rebounds.

Aside from disagreements over education funding and welfare, Schwarzenegger spokesman Aaron McLear said, Democrats remained "unwilling" to make deeper cuts to create a healthy reserve so the state can weather an economy that could get worse before it gets better.

Democrats are pushing for the budget package to include changes in state law that would assure repayment of roughly $11 billion diverted from education when the economy improves and create new guarantees that schools would not lose money in future downturns. The governor said he would support repayment of the $11 billion but will not allow permanent changes to the funding formulas.

"I think we are not going to do that," Schwarzenegger told reporters, "because Proposition 98 can only be changed by the people."

Schwarzenegger says the changes he wants to state government operations would produce long-term savings by making various programs more efficient. Democrats have resisted, saying there is not enough evidence that they would be effective, and they have not been properly evaluated through normal legislative hearings.

One contentious proposal, some participants said privately, would change the state welfare program to increase penalties for recipients who do not meet minimum federal work requirements. Currently, emergency cash is available for children of parents in that category; those grants could be eliminated under Schwarzenegger's plan.