California to Run Out of Cash by Next Week

Thursday, 29 Jan 2009 11:43 AM

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SACRAMENTO, California – The giant calculator outside Governor Arnold Schwarzenegger's office adds nearly 500 dollars each second as California's budget deficit balloons inexorably toward 40 billion dollars.

The California governor's "deficit clock" calculator is a graphic reminder of what the State Legislative Analyst's Office calls "the fiscal crisis that has put our state on the edge of disaster."

And there soon might be much more painful examples for Californians, whose state ranks as the world's eighth-largest economy.

As Schwarzenegger and state legislators battle over proposed new taxes and spending cuts, state Controller John Chiang has warned the state could run out of cash as early as next week, saying payments may be deferred from February 1.

Chiang has already imposed a delay on tax refunds and has threatened to stop paying some bills. Aid to students and the poor could be halted, and some state offices will have reduced hours.

Moody's Investors Service has warned of a possible downgrade in the California's credit rating - which would make it more difficult and expensive for the state to borrow.

Schwarzenegger has proposed a wide-ranging package of taxes and spending cuts - including a three-year increase in the state sales tax and an alcoholic beverage tax hike of five cents a drink.

He also hopes to impose taxes on activities like auto repairs and playing golf that have been tax-free until now.

In all, Schwarzenegger is seeking 17 billion dollars in spending cuts, 14 billion dollars in additional state revenue and 10 billion dollars in borrowed money to cover the deficit, expected to reach more than 40 billion dollars in the next year and a half.

"The reality is that our state is incapacitated until we solve the budget crisis. The truth is that California is in a state of emergency," the governor said in his State of the State Address earlier this month. "The deficit is a rock upon our chest and we cannot breathe until we get it off."

California's 1.8-trillion-dollar economy rivals that of Italy or France.

Its Silicon Valley is the global center of high technology, Hollywood is the heart of the movie industry and the state is a world leader in agricultural products from wine to cheese.

With a population of 36.5 million, it is home to nearly one of every eight Americans.

Its fiscal problems mirror those of the entire United States, but it is the only state that requires a two-thirds legislative vote to pass a budget or increase taxes.

That requirement has hampered Schwarzenegger's efforts to get new sources of revenue approved.

Jean Ross, executive director of the California Budget Project, said the two-thirds rule prevented the state from collecting enough revenue as it headed into the economic downturn.

The housing crisis also has hit California particularly hard, further depleting tax collections, and Ross said the state is "looking at red ink for the foreseeable future."

"Our housing bubble was bigger, and when it popped it hit us that much harder," she said. "Most economists agree we'll come out of the situation later than other states."

Politics also have a big role. Schwarzenegger is struggling to convince his fellow Republicans to approve new taxes.

Though California is a Democratic-leaning state and is home to some of the most liberal cities in the country - such as San Francisco - it has very strong conservative and anti-tax roots.

Kris Vosburgh, executive director of the anti-tax Howard Jarvis Taxpayers Association, said the budget problems cannot be solved by raising taxes.

He ridiculed the governor's deficit calculator as an "overspending clock," saying the way to balance the budget is by cutting spending.

"We add insult to injury by raising taxes, because not only do we increase the burden on taxpayers but the end result will be less government revenue because of decreased economic activity," he said.

On a recent morning, Japanese tourists posed in front of Schwarzenegger's deficit calculator as it increased by 29,000 dollars per minute.

A group of schoolchildren stared at the whirring numbers as they raced past 8.5 billion dollars. "Hey, guys, check this out!" an excited youngster yelled to classmates. A parent somberly instructed him: "That shows how much we're in the hole, how much we're in debt."

© 2009 Agence France Presse. All rights reserved.

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