Both the Senate and the Assembly rejected a proposal by the movie star-turned-governor to hold a referendum on the bond plan on March 2 partly because they objected to a companion proposal that would have limited increases in state spending. Schwarzenegger had demanded that the bonds be sold only if the spending cap also was approved.

California, the most populous U.S. state, is at risk of running out of money in June without the bond sale. The state is facing a $4 billion budget deficit this year and needs money to repay $14 billion in notes and warrants that come due in June.

``Our inaction here indicates that it's business as usual here no matter what the cost to California,'' Sarah Reyes, a Democrat assemblywoman, said on the Assembly floor. ``All I have to say to Governor Schwarzenegger is welcome, welcome to a place where partisan politics remain and a place where it's business as usual.''

Schwarzenegger was swept into office in an Oct. 7 election that removed Democratic incumbent Gray Davis from office three years before his term was set to end. The body-building governor pledged to remedy the fiscal problems that have given California the lowest credit rating of any U.S. state. Three years of multibillion-dollar budget shortfalls have left California with the highest borrowing costs of any state.

No Limit

One day after taking office last month, Schwarzenegger proposed that lawmakers put a measure to a public vote in March, when California votes in its presidential primary, asking voters to approve a $15 billion general obligation to pay for previous budget deficits and for a spending cap based on growth in population and inflation.

Democrats, who control both the Senate and Assembly, objected to Schwarzenegger's proposal, saying the cuts it required in programs were too severe. They also said it would have given Schwarzenegger too much authority to cut the budget mid-year. They only could have rejected such mid-year cuts with a two-thirds override-veto vote.

Republicans objected to an alternative spending cap proposal by Democrats because the formula used to calculate the cap would have allowed for larger spending increases than the Republicans wanted.

``There's no limit,'' said Republican Assemblyman Ray Haynes. ``The only limit in this is that you can spend all that you take in.''

Alternative

Lawmakers in July approved a plan to sell $10.7 billion in sales-tax backed bonds to fill part of a $38 billion deficit in the current fiscal year. A conservative taxpayer's group sued to block that sale because the constitution requires voters to approve bond sales.

Schwarzenegger's administration decided today to fight the court challenge to the $10.7 billion bond by seeking a judge's validation that the bonds are legal. California may need to sell notes or warrants next year to pay its bills if its legal effort doesn't succeed. It also will have to further cut spending this year, Schwarzenegger spokesman Rob Stutzman said. California's budget is almost $100 billion.

``The $10.7 billion doesn't get all the way there,'' Stutzman said. ``The department of finance will look at a number of options to make sure the state has cash flow.''

Intervention

The legislature's failure to approve Schwarzenegger's plan is the first legislative defeat for the Republican governor, who in his first three weeks in office fulfilled campaign promises to repeal a tripling of the car tax and a law that allowed illegal immigrants to obtain driver's licenses.

Schwarzenegger has vowed to go over the heads of the legislature and place a spending limit on the ballot for the election in November 2004.

``The governor is planning to proceed to the ballot, as he said he would, to allow the people to give the addicts an intervention,'' Stutzman said.

As lawmakers spent the week negotiating the details of the bond sale and spending limit, Schwarzenegger staged three rallies around the state and appeared on radio shows urging voters to pressure the legislature into adopting his plan by Friday. The tactic prompted criticism from Senate President John Burton, a Democratic who mocked the governor's pledge not to engage in the politics of the past.

``This isn't politics as usual,'' Burton said on the Senate floor. ``Politics as usual might have had the governor in the Capitol in these weeks instead of going around the state.''

Senator Jim Brulte, a Republican who has advised the governor, accused the Democrat-controlled Senate of not listening to the will of an electorate that voted two months ago in favor of Schwarzenegger after five years of a Davis's administration.

``You bankrupted us,'' Brulte said. ``It took you five years to bankrupt us and you won't give the new governor five weeks.''