LOS ANGELES -- California lawmakers are scheduled today to resume budget negotiations after a stalemate developed last week over attempts to link workers' compensation reform with certain revenue raising proposals.

The budget delay means the state cannot sell an interim note issue of $1 billion or more. That sale would have gone forward today if Gov. Pete Wilson had signed the $55.7 billion budget by last Wednesday.

Gov. Wilson threatened last week to veto the budget if final agreement could not be reached on proposals to close a remaining $2 billion deficit. Lawmakers and the governor have already agreed on tax increases and spending cuts to eliminate most the record $14.3 billion gap.

On Wednesday night, however, the governor and legislative leaders used a technical maneuver to avoid a veto. Gov. Wilson sent the budget bill back to the Assembly and then it was immediately returned to him. That action gave the governor a new 12-day clock in which to approve the budget.

The clock had already been ticking because legislators approved the budget in late June. But Gov. Wilson declined to sign it until all revenue measures are in place to fund the budget.

James Lee, a spokesman for the governor, said Friday that "the fact the governor did not veto the budget" is a sign that he wants to reach agreement on the final details. State leaders, however, were not expected to do any work on the budget over the holiday weekend.

The governor has acknowledged that a lengthy budget delay likely will prompt rating agencies to downgrade California's debt. But Mr. Lee said Friday that Gov. Wilson and his fellow Republicans in the Assembly are determined to seek workers' compensation reform in exchange for proposed tax increases on business and the state's top earners.

The governor believes workers' compensation reform is more important to the state in the long run than maintaining its current bond rating, Mr. Lee noted.

"In the long-term scheme of things, the bond rating doesn't attract business," Mr. Lee sazid, adding that skyrocketing workers' compensation costs are one reason California is "no longer competitive with other states in attracting business." The state risks harming its tax base without a healthy business climate, Mr. Lee said.

But Democrats, who control the Legislature, criticized the governor's stance last week, arguing that he was unfairly using the budget process as leverage for raising the workers' compensation issue. But Assembly Republicans are unlikely to vote for the proposed tax package affecting business and wealthy taxpayers "unless they get something in return," Mr. Lee said.

Rating agency officials have been willing to wait on a decision about the state's bonds because enough progress has been made in addressing the massive shortfall. Although they appear willing to wait slightly longer to see how this week's budget deliberations proceed, it also is clear that each day of budget delay brings California closer to a possible downgrade.

Standard & Poor's Corp. rates California general obligation bonds AAA, but it has the debt on CreditWatch with negative implications. Moody's Investors Service and Fitch Investors Service also rate the state's GOs triple-A.

California's treasurer in May postponed a $1.4 billion GO sale that had been planned for June, citing concern that the new issuance could trigger a rating downgrade because of the state's budget problems.

The interim note borrowing -- to tide the state over until it can sell its regular $5 billion revenue anticipation note issue in August -- is on hold until Gov. Wilson signs the budget.

The budget delay could lead some potential investors to park their money elsewhere, rather than be subject to the continuing uncertainty of California's budget impasse. If the level of demand for the interim notes tapers off, it could affect the size of the issue.

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