The Great California Fiscal Earthquake

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Nick Ut / AP

California Governor Arnold Schwarzenegger

As 2009 settles in, California isn't quite the Golden State anymore. School districts are expected to lose billions of dollars in financing for improvements and development, and health-care services for the elderly, infirm and poor will most likely deteriorate. State employees are facing payroll cuts, unpaid leaves and a hiring freeze. Money for firefighting in parched Southern California is drying up, as is financing for levees in flood-plagued northern environs of the state. And that's just for starters as California faces a budget deficit of more than $41 billion over the next 18 months. (See pictures of the aftermath of a California firestorm.)

It would help to have a budget, but state legislators have been at an impasse for weeks, haggling over various proposals — and weighing their political consequences. On New Year's Eve, the administration of Governor Arnold Schwarzenegger proposed a new budget plan that includes painfully deep spending cuts and $14 billion in tax increases. Although the proposal is not likely to be the one that finally passes, there is no doubt that few Californians will be untouched by the fiscal crisis. In December, unable to wait for a budget solution any longer, the state pre-emptively canceled $3.8 billion for 2,000 public infrastructure projects, including new prisons, veterans' homes and highways.

The list of cuts and shortfalls is almost apocalyptic. According to the UCLA Anderson Forecast, thousands of lost jobs in the public and private sectors will cause California's unemployment rate to leap to 8.5% by the end of 2009 (it was 6.5% in October 2008). If the state runs out of cash by mid-February, as has been predicted, hundreds of state vendors, such as electrical-supply wholesalers, food-service companies and building- and grounds-maintenance firms, will be sent IOUs from the state government. Deductions for each dependent may drop from $309 to $103 on Californians' 2009 income tax forms. And, by the way, don't count on a tax refund showing up soon after you file in April — one of those IOUs may find its way to your mailbox instead, explaining that the refund may be delayed.

Even drowning one's sorrows may be difficult here in "fiscal Armageddon," as Governor Schwarzenegger has referred to the budget crisis; one of his solutions is a sizable tax on booze. "At a time we should be investing for our unmet needs and stimulating the economy, we're going in the other direction," says California state treasurer Bill Lockyer, a Democrat. "Every day, we go deeper in the hole."

California has found itself in this financial quagmire as a result of a collision of events. "It really has been a combination of things that have created the monstrosity that we are now in," says Barbara O'Connor, director of the Institute for the Study of Politics and Media at Sacramento State University. She cites inflation, population growth and mandates (like Proposition 13, which placed a limit on state property-rate taxes that resulted in restrictions on tax increases) as having a snowball effect over the course of 30 years. Add these to California's extremely high home-foreclosure rate and a global recession (approximately 1 in 4 jobs in the state has international-trade ties), and the deficit quickly adds up. In the past, the state would borrow or sell bonds to bridge the gap, but with the current credit crunch, few investors are willing to offer assistance.

Of course, the deficit is growing larger each day that legislators struggle to come up with a solution. California is one of only a handful of states to require a two-thirds-majority vote in the legislature to pass a state budget. The Democrats dominate both the senate, 24 to 15, and the assembly, 51 to 29. (There is one vacancy in the senate.) With such deep cuts on the line, Republicans and Democrats have squared off, arguing whether raising taxes or reducing welfare programs is the best way to go. In December the Democrats engineered a plan that could bypass the Republican vote and, with a combination of spending cuts and tax hikes on sales, gas and income, melt the deficit by $18 billion. However, this week Schwarzenegger rejected the plan, saying his demands, like limiting environmental protections on public-works construction, were not met, and the Republicans filed a suit in state appeals court in an effort to block this sort of majority-vote proposal from occurring again. The pressure is on for the parties to quickly come up with a working budget before the well runs dry in February. In the meantime, all the political feuding has left the state's citizens wondering exactly when and where the hammer will drop.

"The longer they go, it gets even more and more serious for all of us," says David Sanchez, president of the California Teachers Association (CTA). He is expecting schools to potentially take a $10 billion hit this year. Last month the CTA filed its own initiative for a 1 sales-tax increase earmarked solely for public schools and colleges. But Sanchez — like others in the state — says he will not know precisely how to budget for this upcoming year until a legislative solution is passed. "The unknown," he says, "is very scary."

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