Update on the California Budget Crisis

by: Richard Dwyer

California's Constitution requires that a budget be reached by June 15th. The budget is now officially past due. Here are some developments to keep an eye on:

  • California's new fiscal year starts on July 1, 2010. The Constitution prohibits the state from spending money without a budget. It is constitutionally prohibited from running a deficit. Severe cuts will be needed between now and July 1, 2010. Politicians cannot "kick this can down the road." A budget must be reached by July 1, 2010 and it will include significant budget cuts. The state has already announced plans to lay off 22,000 teachers. As of April 2010, the state unemployment rate stood at 12.6%. The stress is palpable. On June 15, 2010, the California Employment Development Department ("EDD") issued a news release entitled "Many Unemployed Workers in California to Experience an Interruption in Jobless Benefits" which wryly noted that "a few hundred thousand unemployed workers currently relying on extension benefits to help sustain them while looking for new work in this weakened economy may now experience an interruption in their unemployment Insurance (UI) benefits." The EDD is now alerting claimants of this new economic reality.
  • Estimates place California's budget deficit at approximately $19.1 billion. Many believe the figure is higher. Governor Schwarzenegger has warned that the state will have problems getting bridge loans to pay its bills if a budget was not agreed upon by June 15, 2010. That deadline has now come and gone. Not surprisingly, Fitch has downgraded its rating on the state from "stable" to "negative."
  • Schwarzenegger - a lame duck - has proposed the elimination of the states welfare-to-work program called Calworks, a 5% pay cut for government workers, and a 60% reduction in state mental health programs, among other cuts. The state legislature is not in agreement. Two-thirds of the legislature must approve any new budget. A deadlock has ensued.
  • The spending pressures continue to mount. The board of California Public Employees' Retirement System ("CalPERS"), the state's largest public pension fund, is requesting that the state boost its contributions to $3.9 billion a year to help CalPERS recover from investment losses.

The next two weeks will see the slashing of billions of dollars from California's budget at a time of double digit unemployment. The situation is a fluid one.

Disclosure: Author lives in California