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The move angered the Governor, who vowed to veto the Democrats' plan because he thinks it's illegal.
"I think they know I would never sign those kinds of things. So why waste the time? Why run out of time and all of a sudden we have to hand out IOUs," said Gov. Arnold Schwarzenegger.
Without a budget revision in place, the state is just days away from issuing billions in IOUs to pay its bills.
An agreement has been elusive because Democrats refuse to eliminate social programs to the poor and the governor and Republicans are equally stubborn about raising taxes.
"Where do we go from here? We have a real crisis bearing down on us in a couple of days. We know you don't want to see IOUs, and we don't want to see IOUs issued," said Senate Minority Leader Dennis Hollingsworth, R-Murrieta.
Democratic leaders begged the governor to consider a package that doesn't solve the deficit, but averts the IOUs by cutting and delaying billions of dollars to education.
It's just two Republican votes shy in the Senate and must be enacted before July 1.
"The harmful prospect of us issuing IOUs really should not happen on his watch," said Assembly Speaker Karen Bass, D-Los Angeles.
Because of the stalemate, Healthy Families, the state-funded health coverage for low income children, announced it will stop taking on new enrollees next month.
David Crum turned to the program just seven months ago when he lost his job and worries the state will start kicking people out.
"I really don't want to lose this open enrollment for my family. I really want to keep this program long-term to make sure my kids are covered," said Crum.
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