But Gov. Arnold Schwarzenegger was resolute in demanding a complete budget solution, not a partial fix that would merely delay the state's immediate cash crunch.

"I would definitely veto if they send me down the three bills that will only address only one-eighth of the budget problem," he told reporters Tuesday afternoon outside his state Capitol office.

Both Schwarzenegger and Democratic legislators were counting on nearly $5 billion in cuts to education and deferred payments to schools that had to be made before midnight, the end of the 2008-09 fiscal year. And, despite Schwarzenegger's veto threat, lawmakers were trying to take action to save that money.

To make matters worse, without budget fixes by midnight - the Senate was still meeting late Tuesday night - the state could be required to pay schools additional billions in the new fiscal year that begins today due to a quirk in Proposition 98, which decides how much California spends on schools each year.

"This is a $5 billion to $6 billion swing that I think is completely unnecessary," said Senate President Pro Tem Darrell Steinberg, D-Sacramento.

Without solutions to bridge the entire $24.3 billion gap through June 2010, state Controller John Chiang will begin issuing IOUs immediately after the state's financial officials meet Thursday to set the interest rates on the IOUs, said Hallye Jordan, a spokeswoman for Chiang.

Schwarzenegger also plans to force 220,000 state workers, who are already taking two furlough days a month beginning this month, to take a third day off without pay.

The three bills - which would have made the immediate cuts in schools, saved the state additional cash by deferring certain payments to schools and made technical changes in how the state shifts funds from redevelopment agencies to schools - were unable to gain the required two-thirds majority support in the state Senate.

The three bills passed out of the Assembly last week with bipartisan support, but Senate Republicans were refusing to support them, demanding a budget proposal that solves the entire shortfall.

In other action, Democratic legislative leaders sent to Schwarzenegger two budget bills that were passed in a simple majority vote without Republican support. One contained $11.4 billion in spending cuts and the other would have raised billions of dollars by various accounting maneuvers.

Dems' promise

The Democratic legislators also sent a letter to the governor promising to put together a comprehensive reform package - in response to his demand - that would root out fraud in health and social service programs and streamline government, and send the plan to the governor in 60 days, Steinberg said.

But Schwarzenegger vetoed the two budget bills anyway, writing in his veto message to lawmakers: "I have been very clear that the Legislature must solve the entire deficit, must make the hard decisions now, and must not push the problem off to tomorrow."

As the deadlock continued at the Capitol Tuesday, a citizens commission voted unanimously to reduce by 18 percent lawmakers' health benefits, per diem pay and monthly allowances for state automobiles. The cuts also affect other top officials.

The cuts, which go into effect Dec. 1, would save the state about $1.2 million annually, according to the California Citizens Compensation Commission. The decision follows a May 20 vote by the commission to reduce legislators' and other statewide elected officials' salaries by 18 percent that goes into effect in December 2010.

Lack of jurisdiction

Chief Legislative Counsel Bill Curtis cautioned that the commission had no jurisdiction over lawmakers' per diem, which is currently set at $173 for each day they are working in Sacramento. The California Victim Compensation and Government Claims Board sets the per diem, Curtis said.

The commission acknowledged Curtis' warning and passed the resolution anyway. Other legal advisers have informed the commission that per diem is a fringe benefit that would fall under their purview, said Commission Chair Charles Murray.

If the commission's decision to reduce the per diem is disputed, the matter will be handed over to the Assembly speaker and the Senate president pro tem.

E-mail the writers at myi@sfchronicle.com, rprocter@sfchronicle.com and wbuchanan@sfchronicle.com.

This article appeared on page A - 1 of the San Francisco Chronicle