California faces insolvency, governor warns - By Matthew Garrahan

Posted by ProjectC 
By Matthew Garrahan in Los Angeles
January 16 2009

Arnold Schwarzenegger on Thursday warned that California faced insolvency “within weeks” after a protracted budget dispute that has left its finances in tatters.

The governor of the most populous US state, which would be the world’s eighth largest economy if it were a separate country, said California’s record $42bn deficit left it in a “state of emergency”.

“It doesn’t make any sense to talk about education, infrastructure, water, healthcare reform and all these things when we have this huge budget deficit,” he said in his annual “state of the state” address. “Each of us has to give up something because our country is in an economic crisis and our state simply doesn’t have the money.”

California signed off a budget last summer, but it quickly became clear that the plan had been based on incorrect assumptions about economic growth and tax revenues.

The state has spent the last four months trying to agree a new budget with no success. Its legislature requires a two-thirds majority, yet is evenly split between Democrats and Republicans, with neither side showing any sign of ceding ground.

Republicans are calling for sweeping spending cuts, which the Democrats oppose. The Democrats, meanwhile, say the budget should be balanced by tax increases, which have been blocked by the Republicans.

Mr Schwarzenegger blamed the deadlock on ideological differences.

“Conan’s sword could not have cleaved our political system in two as cleanly as our own political parties have done,” he said, adding that “rigid ideology has been rewarded and pragmatic compromise has been punished”.

The deadlock has already begun to affect life in California. Funding for more than 2,000 infrastructure projects, including school and highway developments, has been frozen to preserve dwindling cash resources.

Mr Schwarzenegger has also issued an executive order requiring that state employees take two days unpaid leave each month. The order has outraged many public officials, including Bill Lockyer, the state treasurer, who said the governor did not have the legal authority to impose enforced time off.

Mr Schwarzenegger on Thursday proposed a novel solution to break the deadlock, saying legislators – and the governor – should lose per diem expenses and face pay cuts for every additional day the budget was late. “If you call a taxi and the taxi doesn’t come, you don’t pay the driver,” he said. “If the people’s work is not getting done, the people’s representatives should not get paid either.”

Copyright The Financial Times Limited 2009