This is effectively bankruptcy. Bloomberg reports.
California is poised to begin its new fiscal year tomorrow without a plan in place to close a $24 billion deficit as the state prepares to conserve cash by issuing IOUs to vendors who are owed money.
Republican Governor Arnold Schwarzenegger and Democrats who control both chambers of the Legislature are scheduled to meet throughout the day to reach a compromise. Schwarzenegger has sought spending cuts that would eliminate welfare programs and push nearly 1 million low-income children out of government health insurance. Democrats want fewer reductions and some tax increases to make up the difference…
Schwarzenegger yesterday vowed to veto a $23 billion package of tax increases, spending cuts and accounting maneuvers Democrats passed by a simple majority rather than the required two-thirds vote. Democrats argued that the tax bills needed only the simple majority because they cut some taxes, while increasing others an equal amount and raised fees that don’t meet the two-thirds approval requirement…
“Is there anyone in this room who believes that we are going to magically solve this problem by midnight? It’s just not likely,” said Senator Mark Leno, a San Francisco Democrat.
While you may not have heard of similar problems in other states, 48 states have funding gaps to close. And in some states the percentage gap is even larger than in California – New York and Nevada where budget gaps are nearly one-third of revenues -to name two. By the way, the California IOUs will pay 5% interest.
Update 1 Jul 2009: The impasse was not cleared. IOUs are coming.