Arnold Schwarzenegger under Siege

Imagine strongman Arnie under siege. Bulging muscles are no match for fiscal innovativeness as California buckles under the threat of going to the poor house.

California Governor Arnold Schwarzenegger has just declared a fiscal emergency on July 1st. This will literary force lawmakers into having to tackle a budget gap or else face the prospects of drastic cut-back measures to keep the state working.

Lawmakers debated late into the night but disagreed on a plan to balance California's budget — a yawning deficit of US$26.3 billion (RM92 billion) — in time for the new fiscal year, which began yesterday.

State officials has now no choice but to suspend payments to vendors and local agencies,substituting it with debt papers-"IOU" notes promising payment.

The most populous US state — the eighth-largest economy in the world in 2006—with coffers stretching to breaking point,now risks further cuts to its credit ratings, which would increase its borrowing costs.


Schwarzenegger,in his usual Terminator stance promised the people that he will run with the problem until it is solved. Is Salvation in sight?

As a norm, California lawmakers struggle with budget deadlines nearly every year. This time it is more pricky;as the state experienced its worst drop in revenues from personal income taxes since the Great Depression. The state is in recession and joblessness is on the rise.

Democrats, who control the legislature, and Republicans agree on the need for spending cuts but are split over whether to raise taxes to help fill the gap.

Republican lawmakers and Schwarzenegger, also a Republican, have ruled out tax increases. They want deep spending cuts to balance the budget. Democrats say that would slash the state's safety net for the needy to the bone.

The White House said it was keeping a close eye on California's woes even though federal coffers are already overstretched with massive bailouts of the US financial sector and automakers. It did not hold out an offer of help.

California risks being unable to pay all of its bills this month. State Controller Chiang plans to issue IOUs by today to state vendors, some local agencies and to the elderly, disabled and college students who receive state aid.

Bank of America said it would accept IOUs from customers through July 10, becoming one of the first major commercial banks to jump on board the programme.

Chiang plans to send US$3.36 billion in IOUs this month to help the state make US$10.9 billion in other payments, including money owed to investors holding California's debt.

"California has never defaulted on its debt obligation and we don't plan to do so," he told Reuters.

California needs to reassure Wall Street it can pay its debts because state officials need to sell US$7 billion to US$9 billion of short-term debt once there is a budget agreement.

So,that's high finance for you.