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The U.S. state of California is suffering from an ongoing budget crisis in which it faces a budget shortfall of at least $11.2 billion,[1] projected to top $40 billion over the 2009–2010 fiscal years.[2]



On September 23, 2008, about 3 months after its due date, Governor Arnold Schwarzenegger signed the 2008-2009 budget.[3][4] Worsening financial conditions that followed left the state with a large shortfall.

A two-thirds vote is required to pass a budget, and in both the original budget negotiations and in the attempt to revise the budget no political party by itself had enough votes to pass a budget. The majority Democrats fought to minimize cuts to programs, while most of the minority Republicans refused to accept any tax increase. The original budget was put together by Democrats and some Republicans using spending cuts, internal borrowing, and accounting maneuvers.[3][4]

In November 2008, Schwarzenegger proposed spending reductions including the following measures concerning state employees[5]:

  • One furlough day per month, equivalent to a reduction in pay of about 5 percent.
  • Elimination of the Columbus Day and Lincoln's Birthday holidays.
  • Employees who must work on holidays would receive holiday credit for later use, as opposed to receiving time-and-a-half pay.
  • Employees would more easily be able to work four ten-hour days per week.
  • Overtime pay rules would be changed so that leave time would no longer be considered as part of time worked.

In December 2008, Schwarzenegger ordered mandatory furloughs of two days per month for state employees, as well as "layoffs, reductions and other efficiencies" to achieve savings in the General Fund of up to 10%.[6][7]


Labor organizations filed lawsuits and took other actions in an attempt to stop the furloughs of state workers.[8] On Jan. 29, 2009, a Superior Court Judge ruled that Schwarzenegger had emergency furlough power, and on February the 3rd District Court of Appeal in Sacramento said the appeal to the decision came too late and was incomplete, so judges were unable to determine if a halt to state furloughs is legally justified.[8] As part of the furlough, various state offices were closed on the 1st and 3rd Fridays of every month from February 1, 2009 through June 30, 2010, which was estimated to save the State $1.3 billion.[8]

By February 2009 California State Controller John Chiang delayed $3.5 billion in state payments (such as state tax refunds) for at least 30 days because the state was experiencing cash flow difficulties.[9]

The state legislature passed a budget in February 2009 that depended on the voters approving tax extensions and money redirection into the general fund, which in May the voters did not approve.[10] Governor Arnold Schwarzenegger then proposed $16 billion in cuts and also borrowing money from local governments. In the legislature, the Republicans agreed to lower the income of state employees, but the Democrats resisted these proposals and suggested increasing fees to be paid by smokers and oil wells. Neither party agreed to borrowing money from local governments.[10]

On April 1, 2009, the state sales and use tax was temporarily increased by one percentage point.[11]

The state had been selling bank-guaranteed short-term notes to get cash, but in June 2009 its credit rating was lowered.[10] When the state asked for a federal guarantee of the notes, the Obama administration said it had no legal authority to back state notes and that the state should solve its own problems.[10]

On July 1, 2009, Schwarzenegger ordered state workers to take a third furlough day each month.[12] On July 2, 2009, the state government began issuing IOUs to meet its short term financial obligations.[13] Five days later, Bank of America, Citigroup, Wells Fargo, and JP Morgan Chase announced that they would stop accepting IOUs by July 10. Fitch Ratings dropped California's bond rating from A-minus to BBB.[14]

On July 24, 2009, the state government passed a budget that included $15 billion in service cuts, including $8.1 billion in education cuts. Eliminated from the final plan included proposals to borrow money from city and county governments and to drill for oil off the coast of Santa Barbara.[15] Chiang announced in August 2009 that the IOU program would end the next month and that California would pay off 327,000 IOUs worth almost $2 billion.[16]

The budget crisis led to cutbacks and many layoffs at state universities in California. In order to curb the budget shortfalls, the California Board of Regents voted on a 23% raise in all tuition costs for state universities. This led to the 2009 California college tuition hike protests.[17]

See also


  1. ^ "California 'faces budget crisis'". BBC News. 2008-12-02. Retrieved 2009-02-08.  
  2. ^ "California delaying tax refunds amid cash crisis". Reuters. 2009-01-16. Retrieved 2009-02-08.  
  3. ^ a b "Schwarzenegger signs record-late state budget". Sacramento Bee. 2008-09-23. Archived from the original on 2009-07-27. Retrieved 2009-02-17.  
  4. ^ a b "Bill List". Retrieved 2009-07-25.  
  5. ^ "Governor's Open Letter to All State Employees Regarding Impact of Proposed Spending Cuts". California Department of Personnel Administration. 2008-11-06. Retrieved 2009-07-25.  
  6. ^ Schwarzenegger, Arnold (2008-12-19). "Executive Order S-16-08". California Office of the Governor. Archived from the original on 2009-07-27. Retrieved 2009-02-05.  
  7. ^ "Governor's Open Letter to All State Employees Regarding Furloughs and Layoffs". California Department of Personnel Administration. 2008-12-19. Retrieved 2009-07-25.  
  8. ^ a b c Ortiz, Jon (2009-02-06). "Appeals Court Denies Union Request to Halt Furloughs". The Sacramento Bee. Retrieved 2009-08-25.  
  9. ^ McGreevy, Patrick; Jordan Rau (2009-02-01). "Delay of Tax Refunds and Payments Adds to Californians' Struggles". Los Angeles Times. Retrieved 2009-08-25.  
  10. ^ a b c d Steinhauer, Jennifer (2009-06-22). "California’s Solution to $24 Billion Budget Gap Is Going to Bring Some Pain". The New York Times: p. A12.  
  11. ^ Sales and Use Tax Rate Increases on April 1, 2009
  12. ^ Sanders, Jim (2009-07-04). "Furlough Fridays Back - Now Three Days a Month". The Sacramento Bee. Archived from the original on 2009-09-05. Retrieved 2009-08-25.  
  13. ^ Steinhauer, Jennifer (2009-07-03). "Coffers Empty, California Pays With I.O.U.’s". The New York Times: p. A1.  
  14. ^ Knutson, Ryan (2009-07-07). "Big Banks Don't Want California's IOUs". The Wall Street Journal. Archived from the original on 2009-07-27. Retrieved 2009-07-25.  
  15. ^ Steinhauer, Jennifer (2009-07-25). "California Budget Deal Closes $26 Billion Gap". The New York Times: p. A12.  
  16. ^ McKinley, Jesse (2009-08-13). "Budget Deal Ending Need for I.O.U.’s in California". The New York Times. Retrieved 2009-08-25.  
  17. ^ "Tuition Hikes: Protests in California and Elsewhere". Time.,8599,1942041,00.html. Retrieved 27 November 2009.  

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