The state legislature in California has approved a $US24 billion package of bills to close a huge deficit.
The state has been paying its bills with IOUs to conserve cash. Unemployment is at a record 11.6%.
Legislators in the state Assembly passed the package late on Friday after working through the night. It contains $US15 billion in budget cuts.
The state had calculated the budget deficit at $US26 billion, including a $US2 billion reserve sought by Governor Arnold Schwarzenegger.
Under the legislation, public schools would lose nearly $US6 billion, higher education about $US3 billion and prisons more than $US1 billion. Social services would lose more than $US1 billion and health programmes would lose $US2 billion.
In addition, furloughs will continue for state workers for three days per month, cutting their pay by 15%.
Unions for state workers have said they would challenge the bills in court because they contain more than $US15 billion in spending cuts.
City and county officials also say they will challenge it in court.