Fallout: The Financial Crisis

California running out of cash

Marketplace Staff Jan 29, 2009
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Fallout: The Financial Crisis

California running out of cash

Marketplace Staff Jan 29, 2009
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KAI RYSSDAL: A state judge here in California sided with Gov. Arnold Schwarzenegger today. He ruled the governor does indeed have the power to furlough hundreds of thousands of state workers. Two days off a month… without pay. Should save about $1.3 billion through June 2010. Thing is, it’s not clear there’s money to pay the bills coming due next month, let alone next year. There’s a $40 billion budget gap here. And unless Schwarzenegger and lawmakers can agree soon on what do to — taxpayers and students and business owners might wind up getting stiffed right alongside state workers. From Capital Public Radio in Sacramento, Marianne Russ reports.


MARIANNE RUSS: California’s been short on cash for a long time, just ask State Controller John Chiang. He signs the checks.

JOHN CHIANG: The last day the state had positive cash balance was July 12, 2007.

Since then, the state’s been raiding the piggy bank. Borrowing money set aside for oil spill prevention or traffic safety to keep things running. It’s been borrowing from Wall Street, too. But those options are just about exhausted. Chiang says if lawmakers don’t come up with a budget fix soon, California could do the unprecedented: default on a bond payment.

CHIANG: If we default, it would be the equivalent of a nuclear meltdown for the financing in the state of California.

That’s because it would cost the state a lot more to borrow in the future. So Chaing says California simply has to put off some payments, starting next week.

That’s what George Usi is nervous about. He owns a small IT firm near Sacramento. Half of his business contracts are with the state. He expects California will owe him about $400.000 next month. If the delay drags on, he’ll have to make some tough calls:

GEORGE USI: I have no other choice, but to either reduce staff or find other states or other areas to do business, or to close my business all together.

Like many business owners, Usi pays himself last. To prepare for the delay, he’s cut back at home — canceling services like his security alarm and pest control.

State workers and others angry about the expected delays rallied outside the State Capitol last week.

KIA KODERUP-LANE: My name is Kia Kolderup-Lane. I’m a double major at Sonoma state with political science and liberal studies.

Kolderup-Lane says her student aid check — worth a few thousand dollars — is expected to be delayed. She’s not sure what she’s going to do.

KOLDERUP-LANE: I would definitely have to get another job, you know, cause that’s really helpful for a college freshman trying to do a double major. Yeah, I would probably have to drop out.

The rest of the country is watching to see whether California can can dig itself out of this $40 billion hole. Gov. Arnold Schwarzenegger and lawmakers are meeting daily to try to do that. Any solution is likely to include deep cuts to schools and health care programs. The only bright spot is the federal economic stimulus package. By some estimates, California’s share could be more than $20 billion. Gov. Schwarzenegger welcomes the money. But he says it would only be a short-term fix.

GOV. ARNOLD SCHWARZENEGGER: The key thing here is not to let anyone fool themselves by thinking that the federal government should bail out California or as far as that goes, that the federal government should bail out any state.

If the cash crunch drags on for a few more months, the Controller says he’ll have to issue I-O-U’s for a myriad of payments, including state income tax refunds. And state officials are rightly concerned about how the whole mess looks to Wall Street. Over the last couple of months, both Moody’s and Standard and Poor’s have warned that California’s bond rating may go down. It’s already tied with Louisiana for the lowest credit rating among all states.

I’m Marianne Russ for Marketplace.

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