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SACRAMENTO (CBS13/AP) ― The state Legislature on Wednesday began a sharp debate about a plan to close California's projected $24 billion deficit but showed few signs of defusing the crisis quickly.

The Democratic budget plan being debated in the Assembly and Senate had little chance of passing because it appeared to have insufficient support from Republicans. Gov. Arnold Schwarzenegger has also criticized the Democrats' plan to raise taxes on oil drilling, tobacco products and vehicle licensing.

As lawmakers were debating the budget crisis, state Controller John Chiang said he would begin issuing IOUs to thousands of state contractors as soon as next week. He said that without a balanced budget, the state would be $2.8 billion in the red at the end of July, the first month of its new fiscal year.

The IOUs would mean no immediate funding to local governments for social services and private contractors that provide an array of programs for the poor, elderly and frail.

"Next Wednesday, we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Chiang said in a statement. "Unfortunately, the state's inability to balance its checkbook will now mean shortchanging taxpayers, local governments and small businesses."

Chiang and state Treasurer Bill Lockyer have urged lawmakers to act before the start of the new fiscal year on Wednesday. Lockyer wants the ability to get a short-term loan to cover California's cash needs through the first half of its fiscal year but cannot do so without a balanced budget in place.

Without that loan, the difference between California's tax revenue and the spending obligations already in place will begin to widen. Without a solution from the Legislature, the gap will grow to $6.5 billion in September and widen to double digits afterward, Chiang said.

In a midyear fix last February, lawmakers approved a budget for the coming fiscal year but it was out of balance just weeks after Schwarzenegger signed it.

The pressure on lawmakers to reach a deal as the state's cash crisis intensifies was apparent in the 40-member Senate, which started the budget debate.

The Senate's leader, President Pro Tem Darrell Steinberg, said Democrats would reject Schwarzenegger's proposals to eliminate California's main welfare program, a program that provides health care to nearly 1 million low-income children and college grants.

"I want to make our position perfectly clear: We will not, we will not eliminate the Healthy Families, we will not eliminate CalWorks, we will not eliminate in-home care," Steinberg, a Sacramento Democrat, said as he addressed his Republican colleagues. "If that is the price for earning, garnering your votes for this budget, forget about it. It's not going to happen."

Although California adopted a budget in February, the recession has eroded a quarter of the state's general fund, its main bank account. The deficit is so wide that even if all funding for state prisons and universities was eliminated, it still would not be enough to fill the gap.

Democrats and the governor remain billions of dollars apart on cuts, revenue and other solutions.

Schwarzenegger has proposed cutting $15 billion from state spending. In addition to his health care, education and social service cuts, the governor has proposed closing 220 state parks and selling state assets, such as San Quentin State Prison.

To make up the rest of the deficit, Schwarzenegger would borrow $2 billion from local governments, shift money between accounts and accelerate the collection of personal income and corporate taxes.

The Democrats' plan contains $11 billion in cuts.

They would close the rest of the shortfall by doubling the amount of revenue the governor plans to raise through accelerated tax collections and fees. Democrats rejected his plan to borrow from local governments and instead proposed raising that much in new taxes on tobacco products and companies that drill for oil.

In the first round of voting Wednesday, the Senate and Assembly were unable to agree on the portion of the Democrats' budget plan dealing with cuts and some fee increases.

That bill would have reduced spending on K-12 and college education, health care and prisons. It also would have cut funding for state parks and replaced it with an additional fee of $15 on vehicle licenses, which would have been the second hike in the license fee this year.

The bill requires approval from two-thirds of lawmakers because it would take effect immediately but failed to reach that threshold. The houses recessed after the votes and scheduled final action later Wednesday.

It needed 27 votes in the Senate to pass but failed 22-16. Most lawmakers took the bill's failure in stride.

"This is how we operate. We come together, we throw some arrows at each other, then we negotiate," said Sen. Abel Maldonado of Santa Maria, a moderate Republican.

He urged his colleagues to work through the weekend to strike a budget compromise before the start of the fiscal year.

Assemblywoman Noreen Evans, D-Santa Rosa, said the Democrats' proposal is similar to the one offered last month by Schwarzenegger but lessened the effects on some of the state's most vulnerable residents.

"These are deep, deep cuts, members, and they will be felt very harshly throughout the state of California," she said. "As much as I dislike them and as much as we all dislike them, they will solve the immediate deficit we are facing and they will solve the state's fiscal crisis."

Republicans criticized the Democratic plan by saying it did not go far enough to address the full deficit. They also complained, as they often do, that they had been left out of the process and urged Democrats to negotiate a bipartisan solution quickly.

"The state's treasury is rapidly running out of cash. Everyone knows this," said Senate Minority Leader Dennis Hollingsworth, R-Temecula. "Today we are voting on an $11 billion solution to a $24 billion problem. It is not only partial and incomplete but ... it is not a solution."

He and other Republicans have criticized Democrats' call to raise taxes in a slumping economy. He said he does not see how the state can continue to afford the safety-net programs that Democrats are trying to protect, including college fee assistance, welfare and health insurance for low-income children.

Democrats have proposed a 9.9 percent tax on oil production in the state, increasing the cigarette tax by $1.50 per pack and imposing the increase of $15 in the vehicle license fee.

Schwarzenegger, meanwhile, has proposed a fee on homeowner's insurance policies, averaging $48 a year, to fund fire and emergency response services. His spokesman, Aaron McLear, said the governor believes raising any more taxes would cost jobs at a time when the state is experiencing an 11.5 percent unemployment rate, its highest in modern record-keeping.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)