JIM LEHRER: Next tonight, California’s budget crisis. NewsHour correspondent Spencer Michels has our update report.
SPENCER MICHELS, NewsHour Correspondent: State workers, whose jobs are in jeopardy, rallied at the Capitol in Sacramento, while legislators continued to wrangle over how to close a huge $24 billion budget shortfall that would also require big reductions in health and welfare programs.
But that wrangling got nowhere, as various plans could not attract enough votes to become law. State Controller John Chiang says the situation is so bad that he will start paying some California bills with IOUs as early as next week.
JOHN CHIANG, California Controller: It is a very serious matter. Absent action by the governor and legislature to provide for sound cash and budget solution, the state runs out of money on July 28th. When you look at the fiscal crisis here in California, it’s the greatest since the Great Depression.
SPENCER MICHELS: Chiang wants to keep California’s credit, already the lowest rated in the country, from crashing.
So it’s going to be harder for California to get loans or more expensive?
JOHN CHIANG: It’s going to be much more difficult, and I think that’s going to apply to other jurisdictions. There are 47 states that are experiencing some type of budget difficulty today in the United States.
Shortfalls reach crisis levels
SPENCER MICHELS: California's budget woes stem from basic economics. The recession has put less money in people's pockets and have lowered their property values. That means less money in the state coffers at a time when the demand for services is increasing.
Republicans and Democrats agree that some budget cuts are necessary, but the Democrats would like to see some tax increases, while the Republicans say absolutely not.
Lawmakers actually passed a preliminary budget in February, but balancing that budget was dependent on the passage of several ballot propositions that voters rejected in May. As a result, the deficit grew, threatening more and more programs and people.
These parents brought their children to the Capitol this week to lobby legislators not to impose big cuts to education.
KAY LOUIE, Parent: We're obviously already in a crisis situation, and we want to know, as parents, what more we can do to ensure that our education system doesn't degrade even more than it has.
JOE SIMITIAN (D), State Senator: Because so much of our funding goes to schools, that means that schools are going to be inevitably in a bad way as a result of what's happened this year.
Major cuts to come
SPENCER MICHELS: Major cuts are inevitable because the budget shortfall is simply too large. Governor Arnold Schwarzenegger proposed scrapping most of the state's welfare programs, cutting cash assistance for the disabled, as well as releasing nonviolent inmates from state prisons.
He suggested pay cuts and furloughs for state workers. He announced that 200 parks, like this waterfront facility along San Francisco Bay, would be closed and that money for schools and colleges and their students would be sharply reduced.
In fact, some cuts have already gone into effect. Teachers have been laid off as money becomes tighter. The governor wanted to borrow money from cash-strapped local governments to finance state programs.
Democrats, who control both houses of the legislature, are proposing $11 billion in cuts, some of them the same as the Republican governor's, and about $2 billion in new taxes on vehicle registration, tobacco, and oil production.
KAREN BASS (D), Assembly Speaker: What happens is, is that California, in a few words, will go over the cliff.
SPENCER MICHELS: Assembly Speaker Karen Bass is a Democrat from Los Angeles.
KAREN BASS: Hundreds of thousands of businesses and taxpayers would receive IOUs. You have the potential of clinics and other programs that are dependent on state funds being cut off and having to close. You will have women and children who are dependent on state funding for CalWORKs essentially without their resources. You're certainly going to see an increase in homelessness.
Disagreement over new taxes
SPENCER MICHELS: Bass contends the culprits, beside the bad economy, are Republicans who won't, under any circumstances, vote for new fees or taxes.
Unexpectedly, minority Republicans did join the Democrats today in voting for bills to free up some cash and buy time, but the governor said he'd veto them, since he wants to address the deficit all at once.
Assembly Minority Leader Sam Blakeslee.
SAM BLAKESLEE (R), Assembly Minority Leader: All the choices before us are bad ones. However, the worst choice possible would be to further raise taxes and drive more businesses out of the state. That's how we got in the difficulty we're facing right now.
It would produce a very short-term sense of gratification that we've addressed the short-term problem, but we'd lay the groundwork for a much graver problem which would take years to unravel.
SPENCER MICHELS: Gov. Schwarzenegger, who has vowed to veto any new taxes, says he is also against high interest loans or gimmicks like accounting maneuvers to put off the debt. He said he'd rather government come to a grinding halt, though he acknowledges that cuts will impact real people.
GOV. ARNOLD SCHWARZENEGGER (R), California: So I see the pain in their eyes and I hear the fear in their voice. It's an awful feeling. There's no two ways about it. But our wallet is empty, our bank is closed, and our credit is dried up. It's that simple. We must make those cuts, because what is the alternative?
Political stalemate may endure
SPENCER MICHELS: Economist Laura Tyson says the stalemate being played out in California may not end, even if the economy improves.
LAURA TYSON, University of Berkeley: The problem in California is very severe, so a budget fix this year doesn't fix next year.
SPENCER MICHELS: Tyson, a professor at the University of California at Berkeley and former chairman of President Clinton's Council of Economic Advisers, says California's problems are structural, built into the budget process. She says those problems could spread throughout the nation.
LAURA TYSON: California's situation is so dire and so uncertain over the next six to nine months that there really is the possibility that California cannot meet its obligations on its debt. Now, this would be a disaster, not just for the state of California, but for the entire municipal bond market. All states would suffer.
SPENCER MICHELS: So far, the federal government has rejected California's requests for loan guarantees.
Meanwhile, the legal deadline to approve a balanced budget is the end of June -- next Tuesday -- a deadline that weary and increasingly testy legislators may have a hard time meeting.