Gov. Arnold Schwarzenegger has ordered California's state offices closed three days a month to save cash, declaring a fiscal emergency in order to address their growing deficit.
The government shutdown will lead to a third furlough day each month for 235,000 state employees, bringing their total pay cut to about 14 percent.
Still, California's cash-strapped government could start issuing IOUs, instead of paying its bills. The Golden State's budget faces a shortfall of more than $24 billion.
Democrats and Republicans could not reach an agreement on how to fix the budget by the Tuesday midnight deadline.
The state senate rejected three bills designed to save $5 billion, including $3.3 billion in education funding cuts.
Schwarzenegger said he would not sign anything that raised taxes beyond what he already proposed.
"They should forget about that," the Republican governor said, accusing Democrats of going through a song and dance. "Let's get to work, fix it."
Roughly $3 billion worth of IOUs will be sent to state contractors, college students, welfare recipients, low-income seniors, the disabled and others who depend on or deliver state services.
Some economists say California's economy is so big, that problems there could cause fallout nationwide.
Sources: The Associated Press, Fox News