The basic facts of California's budget fiasco are mostly well-known: The state has a $26 billion budget deficit, and the revenue-raising ballot initiatives that Gov. Arnold Schwarzenegger and the state's left-wing legislature sent to the voters were soundly defeated in May.

Those initiatives would have raised taxes by $16 billion over four years in a state that already boasts a top income tax rate of 10.3 percent, the highest in the nation.

California's general budget was $76 billion in 2004, and grew to $103 billion in 2008—a 35 percent budget hike that continued its trajectory even as tax revenues have now dropped below $88 billion due to the weakening economy. Some in the Golden State are crying "déjà vu all over again": A similar drop in tax revenue shocked the state legislature during the technology bust of 2000-2002.

California may have one of the largest economies in the world, but unlike the federal government, it has no printing presses at its disposal to cover budget deficits. Faced with their $26 billion debacle, lawmakers had no way out but to pay bills with IOU notes, as they have been doing throughout the month of July. While selling bonds to the public has traditionally been a popular way of paying for things politicians cannot afford, California is already in debt to its bondholders for $53 billion, with interest expenses alone costing nearly $5 billion per year (that number is expected to exceed $9 billion per year in 2018). Investors do not have an appetite for a functionally insolvent state's debt when the interest payments alone exceed the entire budget of nearly a dozen states.

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