The California Senate approved a plan to solve California’s $26 billion budget state deficit on July 24^th. California’s GDP would make it one of the top 10 nations if it was an independent state, but the current financial crisis has left the state almost insolvent. By February 2009, California was facing a $42 billion budget deficit and its credit ratings were one of the worst. 2000 public works projects since California had to budget to pay for them and current unemployment rates stand at 12%.

In light of this dire situation, Governor Arnold Schwarzenegger signed a budget balancing bill that was later approved by the senate. The bill was a mixture of both cuts and savings; cuts were made in welfare spending. In particular, education, which is the largest single line item in California’s budget, suffered a cut of $6 billion. (This caused protests across the state the day after the bill was signed). To complement these cuts, the budget bill dictated borrowing of $2 billion from local governments, not least because California’s credit ratings are so low they have trouble borrowing money from other institutions.

This bill is viewed as a controversial and problematic one. For one, the bill seems to be postponing its debts to the future, which is not a long term solution. Proposition 98, which requires the state to spend 40% of its general funds on education, means that the cuts California is making to education now has to be repaid in future years, resulting in estimated future liabilities of 10 billion. California has also moved the last payday of this fiscal year into the next for state employees, giving the illusion of creating “savings” of 1.2 billion. This move is also just a postponement of its debt into the future.

The main problem with California’s budget bill, however, is its inability to deal with innate structural problems, especially at a time where tax revenues would be instrumental in helping California out of the bind. For example, Proposition 13 imposes a cap on property tax rates in the state. This led to a tax structure that relied heavily on the more volatile income tax rather than the more stable property tax. 55% of the tax revenues in California is derived from income tax which follows the movement of the market. Additionally, California is finding it hard to raise taxes when tax receipts could help, as raising taxes requires a supermajority vote.

All in all, California’s budget bill do not seem to be nipping the problem in the bud and the future of California’s economy remains to be seen.