Can an entire state file for bankruptcy? Anything is possible in California.
The once proud land of opportunity, the state with an economy bigger than most countries and the mecca for all things celebrity, is going broke.
California's state legislature is trying to pass a budget to cover what has become a Yosemite-sized gap between the money assigned to state operations in February and a rapid decline in coffer-filling state tax revenue. Once again, California's troubles are contributing to the notion that owing "billions" doesn't equate to a reason for panic. Not in this recession anyway, in which "owing billions" has become rather commonplace for companies, governments, banks and ponzi-scheme orchestrators.
As of July 2, should the state legislature and Governor Schwarzenegger not reach terms on a way to make up for the $24 billion shortage between what they make and what they owe, state employees, small businesses statewide and other municipal organizations will be issued IOUs instead of checks. Those who work for the state have already been ordered to take a third day off each month until otherwise told to get back to work.
The state is in the hole for $3 billion in the month of July alone. By September, estimates say it will be closer to $7 billion.
As is typical in most government-run debt reduction strategies, two political parties are in disagreement over how to seal the economic fissure that has shaken the state's finances to their core. The Governor wants to minimize tax increases, borrow and cut existing budgets. The state legislature wants to increase taxes and minimize existing cuts. A bridge needs to built somewhere.
Not at all unlike the cause of financial problems for so many individual Americans, California has simply spent more than it makes. Years of immeasurable cost of living increases, unreasonable home values and already impressive tax burdens have initiated an exodus from the Golden State. Citizens have retreated back to other parts of the country. In a recession of this magnitude, California is a difficult place in which to live.
The state controller has made some beneficial spending decisions along the way by setting aside $424 million for education and other debt payments. However, that money is typically allotted as payment to state vendors and other small businesses. As a result, companies that work directly with the state are having to cut staff, perpetuating the ugly cycle of unemployment that continues to decimate the country. All told, close to $200 million in personal income and tax refunds to corporations are being denied.
The state-issued IOUs are hardly a confidence-builder for state employees, let alone the state agencies that provide mental wellness and health care, services with already dollar-thin budgets. An IOU doesn't treat an Alzheimer's patient or pay for a breathing tube.
This is the second year in a row that the land of redwoods has been felled by a financial crisis. Should a budget be agreed upon before the holiday weekend, don't expect any celebratory rockets' red glare above Sacramento. The state's ongoing operational fiasco is historic. In a state of that size with such drastically disparate political mindsets more concerned with the sound their horns make when rammed together than the well-being of its citizenry clinging to the last handhold above an economic crevasse, the odds of any solution being more than temporary are slim to none. Closer to none.