By STU WOO

California is deep in red ink again, according to a new report projecting that the cash-strapped state faces a $21 billion budget shortfall through June 2011.

The report, published Wednesday by the California legislature's nonpartisan analyst, painted a grim picture of the state's finances -- with a $6 billion gap forecast in the current fiscal year that goes until June 2010 and another $14 billion deficit falling in the 2010-2011 fiscal year.

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Associated Press

Legislative analyst Mac Taylor discusses a report Wednesday on California's fiscal outlook, which includes big deficits over the next year and a half.

Projected California will face annual budget shortfalls of about $20 billion.

Facing so much fiscal red ink, Californians could see another round of spending cuts and tax increases. Since September 2008, state lawmakers have enacted three budgets to close a cumulative $75 billion shortfall. They closed the gap largely through spending cuts and tax increases, but also with federal-stimulus funds and one-time accounting gimmicks. At one point, California was so close to insolvency it was forced to issue IOUs.

The report's conclusions now raise the likelihood of another lengthy impasse among state's hyper-partisan legislators that could threaten California's solvency and force officials to again resort to IOUs.

Republicans, including Gov. Arnold Schwarzenegger, are opposing tax increases. Democrats, who control the state legislature but fall short of the two-thirds majority needed to pass budgets, vow to resist new spending cuts. "It's going to be, as Yogi Berra says, déjà vu all over again," said Tom Harman, a Republican state senator.

"The numbers cry loudly for California to focus on rebuilding our tax base," said Democrat Darrell Steinberg, the Senate president. "The only tried and true way to do so is to use our fiscal levers to increase the number of high-wage jobs."

Regarding the prospect of delayed payment of its obligations, Mr. Chiang, the state's controller, said: "We don't want to revisit the dangerous scenario we were in twice last year. It's all in the governor's and legislature's hands, and if they're serious about protecting Californians, they'll resolve it quickly."

But state legislators don't expect swift resolution. "Given the conduct of the Democrats and their strong refusal to look at reasonable cuts, [IOUs] are probably something that we might see again, unfortunately," said Mr. Harman, who added that Republicans want to look at reining in spending on social programs that have expanded in past years.

Mr. Schwarzenegger, who will release a budget proposal in early January, has said the state needs more across-the-board cuts. "I think it's important not to raise revenues, not to raise taxes," he said Wednesday at a conference in Milan, Italy. "We have to live within our means."

The new budget report said $6 billion of the projected shortfall in the current fiscal year is due to unrealistic budget assumptions about tax revenue and spending on schools and prisons. The remaining $14 billion deficit forecast for the 2010-2011 fiscal-year budget would result from the expiration of temporary budget solutions, such as use of federal-stimulus funds and accounting gimmicks, according to the report.

Economist Bill Watkins, director of the Center for Economic Research and Forecasting at California Lutheran University, said the state needs a combination of tax-revenue growth and spending cuts to solve its problems.

"What the state needs to start fundamentally thinking is how to generate economic activity, because without economic activity, [lawmakers] will never get the situation under control," Mr. Watkins said.

Write to Stu Woo at Stu.Woo@wsj.com