California will be out of money by February as huge debts mount
CALIFORNIA, one of the 10 largest economies in the world, will run out of money by February, causing "financial Armageddon", according to dire new budget projections.
The state's debts are mounting at a rate of $US1.7 million ($2.5million) an hour.
The de facto insolvency of the most populous US state -- home to such economic engines as Silicon Valley, the Central Valley agricultural region, Hollywood, Napa Valley, the Long Beach ports and the defence research and production facilities of Los Angeles, San Diego and the Mojave Desert -- would represent a new scale of catastrophe in a year that has seen financial markets and economies across the world implode.
Treasurer Bill Lockyer has said that $US5billion of public works projects, including road and school construction, will have to be cancelled because the state's lenders are worried about an impending Iceland-style bankruptcy. California -- which has a GDP of $US1.7 trillion -- already has the worst credit rating of any of the 50 US states. He says "without a budget solution, state financing of infrastructure projects will stop".
For California's Republican Governor, Arnold Schwarzenegger, the crisis represents a humiliating final act to his second term. Mr Schwarzenegger, 61, came to power in 2003 because of an almost identical financial calamity, which resulted in his Democratic predecessor, Gray Davis, being "recalled" from office.
At the time, he promised an end to California's tax-and-spend policies and runaway expenses, yet over the past four years of his administration the state's budget has grown by 40 per cent to $US144.5 billion. After the housing crash, recession and credit crunch, the state can no longer afford this with tax collection.
As the crisis continues and California's credit rating deteriorates, the cost to the state of borrowing keeps rising -- a process that could ultimately lead to bankruptcy. Mr Schwarzenegger is proposing the same kind of emergency tax rises that in 2003 turned Mr Davis into a pariah. He has suggested a 1.5 per cent increase in sales tax -- the equivalent of Australia's GST -- and a tripling of the car tax. When Mr Schwarzenegger first ran for office, he did so on a promise to a revoke a similar car tax increase proposed by his predecessor.
Republicans in California's legislature have refused to go along with the proposals and Democrats have refused to cut government programs, hence the stalemate. Mr Schwarzenegger has declared a "fiscal emergency" to keep California's legislature in session until a solution can be found. "When you have a crisis, the most important thing is to make a decision," said a clearly frustrated Mr Schwarzenegger atapress conference yesterday.
He presented an electronic display showing how much the deficit is growing in real time: $US470 a second, $US1.7 million an hour, $US40 million a day. He put it outside his office in Sacramento to get the state's legislators to reach some kind of agreement.
California's biggest problem is the precipitous decline in tax revenues over the past year. By far the most tax revenues come from new property sales, and these have all but dried up. Many home owners who bought during the bubble years are successfully appealing against their property taxes, arguing that the value of their homes is less than they were when they purchased them.
Tax revenues have also been hit by the global recession.
