Californias Budget

No Money to pay Bills

The state’s finances are worsening by the day

TWO weeks ago Arnold Schwarzenegger, California’s governor, signed a state budget that was a record 85 days late. Much cajoling and bullying was required to get it to his desk. At one point the governor threatened to pay state bureaucrats the minimum wage; at another he promised to veto every bill he saw. Few like the end result, which involves spending cuts and a good deal of what John Chiang, the state controller, described as “Enron-style accounting tricks”. And yet it became clear this week that the budget is hopelessly optimistic and will almost certainly have to be renegotiated.
The world’s eighth biggest economy has two problems, both stemming from the economic downturn. First, it is finding it hard to raise enough money to pay the bills. Under normal circumstances the state would sell $7 billion in bonds to tide it through until April, when income taxes flood in. Thanks in part to the delayed budget, the state has been forced to go to the bond markets at a time when investors are wary of everything but Treasury notes.

This obstacle ought to be cleared by the end of the month, when the state would run out of money. Encouragingly, Massachusetts managed to sell $750m-worth of bonds on October 8th. California’s Treasury plans to go to market next week with a slimmed-down $4 billion bond sale. If the credit markets gum up even more than at present, the state may seek relief from the Federal Reserve or from its enormous public-employee pension funds. With the immediate problem out of the way, though, a bigger one will loom into view.
California’s revenues have already dropped below even the pessimistic estimates on which the budget was based. Mr Chiang announced this week that sales-tax receipts in the third quarter were 9% below the May estimate, whereas corporate taxes were 16% lower. The prognosis for income-tax receipts, which account for more than half of all revenue to the state Treasury, is scarcely better. California’s tax regime is highly progressive. The state depends heavily on the rich, particularly the stock-owning Silicon Valley rich. Unfortunately, shares in technology companies have tumbled along with others.
By the end of December, an estimated $3 billion must be found to plug the hole. Sacramento is the last place in America one would want to look for such a sum. Along with just two other states—Arkansas and Rhode Island—California requires a super-majority vote to pass a budget. Yet getting two-thirds of legislators to agree is exceptionally difficult. Thanks in part to ruthless gerrymandering, state politicians are sharply divided between tax-loathing Republicans and public services-loving Democrats.
The Republicans, who make up less than half but more than a third of both the Assembly and the Senate, resisted any tax raises this summer and will probably do so again. If anything, says Roger Niello, a Republican legislator who sits on the budget committee, opinions are hardening as the economy stumbles. Poor Mr Schwarzenegger. His last two years in office may be little happier than the twilight era of Gray Davis, whom he replaced in 2003.

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