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Associated Press/Photo by Rich Pedroncelli

No gold in the Golden State

Economy | On the brink of insolvency, California's budget debacle is a lesson for others

Issue: "Hurtling toward havoc," Aug. 1, 2009

The sign greeting customers at Wells Fargo branches July 13 announced that the bank would no longer accept for cash or deposit California-registered warrants. It listed a telephone number for customers to call for help.

Wells Fargo was joined by Bank of America, JP Morgan Chase, and U.S. Bancorp in refusing the IOUs the state has issued to private contractors, individuals, and social service agencies in lieu of payment for services rendered.

The banks' refusal compounded a budget crisis in the state-the world's eighth largest economy-that found state officials not only unable to pay their bills, but in a scenario unthinkable a year ago, unable to secure credit using the state-issued warrants.

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In the midst of a budget deadlock in the legislature, the state this month began issuing the warrants in July-100,000 worth $355 million by mid-month-as payments. The registered warrants carry an interest rate of 3.75 percent-but only if recipients wait until Oct. 2 to redeem them. Many folks can't hold out that long.

The state owes Gloria Freeman, president of Staff USA in Rocklin, Calif., payments that total six figures and are six months past due. Freeman, whose company provides emergency medical staffing, has had to lay off about 10 percent of her workforce as a result.

Freeman said she has not yet received any registered warrants, and when she does it will be too late to cash them. Meanwhile, thousands of Californians who were expecting state income tax refund checks are finding registered warrants in their mailboxes instead.

Last week some institutions were working with cash-strapped customers to give them home equity loans and lines of credit. The drawback: California taxpayers are paying interest to use their own money because the state can't pay its bills.

In Sacramento, where the fault lies with legislators, state lawmakers sought a stopgap budget plan for 2010 to close almost all of the state's $26.3 billion deficit. Republican and Democratic lawmakers refused to discuss details as a deal with Gov. Arnold Schwarzenegger seemed imminent in meetings that went until midnight. But as the barometer for much of the rest of the nation, how California resolves its crisis will be a lesson for other states increasingly strapped for cash.

In California, statehouse Democrats hold a huge majority but not enough to muster the two-thirds vote necessary to raise taxes, which they favor to balance the budget. Republicans favor cutting programs but have run into roadblocks, chiefly the California Teachers Association. The powerful union has been running television advertisements to pressure lawmakers not to suspend voter-approved funding formulas that guarantee schools a set amount of money each year.

Those guarantees have a hold on the state's budget to the tune of $60 billion a year. The story in the budget crisis, say financial experts, is how the public employee unions have been allowed to bring the richest state in the country to its knees financially.

Two years ago, Schwarzenegger teamed with statehouse Democrats and some Republicans to implement a two-year tax increase to meet budget shortfalls. In May 2009, California voters, already some of the most highly taxed in the nation, soundly defeated a ballot initiative that would have extended those tax increases. Nothing if not a populist, Schwarzenegger has switched fiscal horses and is riding with the people now. But Schwarzenegger and lawmakers must balance the budget by the end of August to avoid defaulting on payments to state pension funds and paychecks to government employees. And as California goes, so goes the nation.

-with reporting by Lynn Vincent in San Diego and David Bahnsen

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