GOP: Calif. slump is demoralizing U.S.

SACRAMENTO, July 5 (UPI) -- The state of emergency for California's economy, the world's eighth largest, is demoralizing the entire country, a Republican strategist said.

Adam Mendelsohn, a former communications director for Gov. Arnold Schwarzenegger, said Saturday California is seen as a trend-setter and is the subject of a "national fascination."

Schwarzenegger told the San Francisco Chronicle budget negotiations are concentrating on cutting spending in health and human services. He said he may reconsider suspending the rules in the state constitution that control education spending. That proposal would guarantee a fight with the state teachers union, the newspaper said.

Schwarzenegger said he is optimistic there will be movement in the budget negotiations and said he believes they will be concluded in a few days.

Meanwhile, the state comptroller is issuing IOUs to state creditors, including some businesses and taxpayers due refunds on the ir 2008 tax returns.