The governor of California, Arnold Schwarzenegger, has declared a fiscal emergency as the state edges closer to financial ruin. State legislators are meeting today to try and make up a budget deficit and avoid issuing IOU notes to service providers in lieu of payment.

State senators have been wrangling for months over how to balance the books but have so far failed to come up with a compromise. California faces a budget shortfall of around 24.3 billion dollars and will issue the IOUs instead of payment to companies providing goods and services.

Mr Schwarzenegger said the legislature needs to make huge cuts in services from education to poverty programmes, or the cash shortage will increase by 6.5 billion dollars before September. In a bid to try and resolve the situation, he has issued an executive order for state offices to close on the first, second and third Friday of every month until June, 2010. Employees working at those offices, which issue everything from drivers’ licenses to building permits, will have their pay docked by three days every month.
 

High unemployment

California traditionally has high income taxes compared to other US states but low property tax. That means it generates more revenue during good economic times but has struggled more than its neighbours during this period of economic downturn. It currently has an unemployment rate of 11.5 per cent – nearly two per cent higher than the national average.

Although a state can’t officially go bankrupt, California is facing a crisis, says David Gamage, Professor of Law at the University of California in Berkeley.

“It’s widely agreed that California’s budgeting process is dysfunctional. The combination of the two-thirds majority rules to pass budgets and two political parties that vehemently disagree on taxes and spending, repeatedly create paralysis.”

Education cuts
Earlier this week the Californian Senate failed to agree on proposals to slash the state’s education budget by $3.3 billion but Mr Schwarzenegger says he is confident a solution can be reached.

“Rest assured that solving the entire deficit remains my first and only priority, and  I will not rest until we get it done,” he said.

“I will not be a part of pushing this crisis down the road - the road stops here."
 

Listen to an interview with Professor David Gamage from the University of Berkeley, California:

Photo: ANP