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California’s budget crisis – Arnie this ain’t Hollywood

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‘I’ll be back’ Arnold Schwarzenegger’s famous movie quote will not scare California’s legislature. These days the governor of California is fighting with lawmakers in Sacramento over how to close the state’s staggering budget gap.

There is no agreement yet on how to balance the $26.3 billion deficit for 2009 although the new fiscal year started on Wednesday. Schwarzenegger has promised to not back down and not push the crisis down the road – the road stops here.

Where the legislature can agree on is that there is fundamental disagreement on how to solve the fiscal problems in California. The governor and his republican peers want deep spending cuts which would terminate social programs and threaten the needy. The democrats, who control the legislature, want to balance the budget by increasing taxes. This impasse has forced Schwarzenegger to declare fiscal emergency.

The White House has refused to offer any help but promised to keep a close eye on the situation. Now the State is preparing to issue short term debt in the form of IOU’s. Bank of America has already agreed to accept IOU’s through July 10. They will go out to those who receive state aid, like the elderly, disabled and college students. This month California plans to issue $3.36 billion to help make its most urgent payments.

A lot is at stake here. California’s income has plunged to a record low during the current economic crisis. Without a credible budget the Golden State may suffer investor confidence. Fitch has already downgraded California’s GOs by one notch to A-minus, the lowest for any US state. Standard & Poor’s has affirmed its A rating but kept it on credit watch with negative implications.

"Should the current impasse over a budget revision remain unresolved long enough that the state’s cash management actions no longer are sufficient to effectively insulate its priority payments — including debt service — the state’s GO rating will likely be lowered, possibly to below ‘A-‘," S&P said.

This is not only California’s problem. Today there are 30 states in the US starting their fiscal year without a budget. Many states will have to raise taxes and probably cut spending deeply if they have not already done so. For 2010 total budget shortfall of all 50 states is projected to be $166 billion, for 2011 its $180 billion. This of course is to be seen relative to other countries. In fiscal 2010 Germany, the world’s fourth largest economy, foresees in its official budget 86.1 billion euro of new borrowing which could balloon over 100 billion if further economic stimulus is needed. The debate about major tax hikes has already started.

State-by-state budget shortfall – interactive map:


Written by Alfred

2. July 2009 at 9:41 am

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