California state controller John Chiang warned Wednesday that if legislators and Gov. Arnold Schwarzenegger fail to come up with a budget-balancing package in the next week, he would begin paying California's bills with IOUs on July 2.

The controller's warning came as legislators began what many on both sides of the aisle acknowledged was a rhetorical song-and-dance over closing a $24 billion deficit that stretches over the fiscal year that ends Tuesday and the one that begins Wednesday.

Republicans in both houses were rejecting a Democratic bill that contained $11 billion in spending cuts — the first of a 20-bill package aimed at reducing the deficit.

The Democratic plan contains new tax hikes and some accounting legerdemain along with the spending cuts. Republican lawmakers and the governor have said the Democratic plan is dead on arrival, and there were indications Democrats were ready to abandon the tax-hike portion of the plan, possibly in favor of "borrowing" $1.9 billion from local governments.

While Democrats control majorities in both houses, the package required a two-thirds approval so it could go into effect immediately. Even then, Schwarzenegger said he would not sign a plan with new taxes, fees and accounting gimmicks, even though he had initially proposed some of them.

"Next Wednesday we start a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Chiang said in a news release. "The state's $2.8 billion cash shortage in July grows to $6.5 billion in September, and after that we see a double-digit freefall."

Resorting to IOUs — whose technical name is registered warrants — would mark only the second time since the 1930s that California has paid its bills that way. The last time was 1992.

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