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California One Step Closer to the Brink

Posted May 20, 2009 12:30pm EDT by Joe Weisenthal in Recession, Banking
Related: spy, dia, ^ixic, xlf

From The Business Insider, May 20, 2009:

Another night in the great direct-democracy known as California.

Facing a minimum $15 billion budget shortfall, voters rejected a series of ballot items that would've closed the state's crisis-level deficit through tax hikes and spending cuts (it's the tax hikes that were the real no go). All of the measures had been expected to fail, even though Governor Schwarzenegger supported them.

Prop 1A would have capped state spending, kept in place a tax hike for two years, while also establishing a so-called rainy day fund. That was the big one and it went down 65%-35%.

The one measure which did pass, comfortably: A rule limiting pay hikes for state politicians.

So now the onus is back on the legislature and the Governor to close the deficit, which stands at $21 billion. It's going to be brutal. The only real areas to get those kind of savings are in core services like education, prisons, health. You know, the big things.

Any affected group will cry bloody murder, no matter what's done. There's been some chatter that perhaps the negotiations could be easy, since the government has few options. We doubt it, though. The state would rather play chicken with Washington, DC and get its bailout, rather than make cuts in education and prison spending. In fact, it might just rather default.

Update: Good thoughts from Megan McArdle, who concludes that California MUST be let to fail.

For more coverage, see The Business Insider:

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