Calif. faces harsh choices

Services may be sharply curtailed

The Associated PressJune 25, 2009 

  • 34 percent

    Decline in revenue from personal income taxes in the first five months of the year. California's budget relies heavily on the income tax.

    $24.3 billion

    California's projected budget deficit for the fiscal year beginning July 1. By comparison, North Carolina is projecting a budget deficit of about $4 billion.

— To hear Gov. Arnold Schwarzenegger and state finance officials tell it, July 28 is California's last stand before fiscal Armageddon.

Top financial officers say that's when the state will run out of cash to pay its daily expenses unless lawmakers pass a balanced budget.

Schwarzenegger has warned that government will come to a "grinding halt." The state controller describes "a meltdown."

But what exactly will happen just five weeks from now is less clear-cut than the dire pronouncements suggest.

California government will not come to a dead stop: Police will still patrol the highways. Prisoners will still be guarded, and state firefighters will stand ready to put out wildfires.

Still, many services normally funded by the state, such as road projects and community health clinics, would either stop or get cut back.

Counties may not have money to run a wide array of social programs. College students who rely on state assistance might have to pay their own fees or consider leaving school.

Dr. Gilbert Simon, owner of the Sacramento Family Medical Clinics, said he could go out of business, forcing his patients to find care elsewhere.

"Anyone who relies on income from a functioning California government is at risk," said Simon. His is the largest privately run health clinic in the region and relies on reimbursements from Medi-Cal, the state version of the federal Medicaid health program for the poor.

How did California reach this point? The state's budgeting system was strained by years of too-exuberant spending. Then the recession caused a sharp drop in sales-tax and income- tax revenue.

The result: California's general fund, the state's main bank account, has a projected $24.3 billion deficit for the fiscal year that begins July 1. If lawmakers do not enact a balanced budget -- either by slashing spending, raising taxes or doing both -- incoming cash will fall below the state's payment obligations by the end of July.

As the state's income starts to drop below the level needed to maintain programs, the state is required to make choices about where to spend its money. Schools and bond holders have first dibs, followed by other debt payments.

State employees, who by law cannot be given an IOU instead of a paycheck, would be next, followed by Medi-Cal and pension payments.

Everyone else, such as vendors and local governments, will have to wait until Schwarzenegger and lawmakers agree on a plan to bring spending in line with revenue.

On Wednesday, the Legislature began debating a Democratic plan to close the deficit, but it did not appear to have sufficient Republican support to pass. Schwarzenegger said he opposed it because it contained tax increases.

The governor hopes the looming threat of a cash crunch puts pressure on lawmakers to strike a deal quickly. He recently rejected Controller John Chiang's proposal for a more expensive loan to fund all state operations while budget talks are under way.

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