California Faces $42 Billion Shortfall

Traffic on Interstate 5 moves through Los Angeles, Sept. 1, 2006.
California Gov. Arnold Schwarzenegger listens to a question during his first news conference after the defeat of his ballot initiatives in the Nov. 8, 2005, special election in this file photo taken Nov. 10, 2005, in Sacramento, Calif.

The shine is off the Golden State. The bruising national recession, plus a political stalemate in Sacramento have left California with a whopping $42 billion budget shortfall.

Gov. Arnold Schwarzenegger has called it a fiscal emergency.

"Our economy is crying out for relief," he said. "We are running out of cash by February."

The country's biggest state soon won't have money to pay its bills - things like highway maintenance - or fund its schools or other critical services.

Californians expecting a state tax refund have been told they might get IOUs instead. State workers may be forced on unpaid furloughs, effectively cutting their pay by 10 percent.

"Ten percent is somebody's car payment, or their gas bill," said state employee Crystal Johnson. "Please stop picking on us. We do your work and we're good employees."

California may be facing the worst budget crisis, but it's not alone. Thirty-seven other states face gaping budget shortfalls this year. In Iowa, schools are taking a hit. In Kentucky, library hours have been cut. The governor of Minnesota says cuts in state services are "inevitable" to close a $5 billion state deficit.

See a map showing the extent of budget shortfalls in every U.S. state.
All 50 states are required to balance their budgets, but California is one of only three requiring a two-thirds majority in the legislature to approve any tax increase. Republicans in the legislature have sworn not to raise taxes. Democrats say the problem is too big to solve with budget cuts alone.

It all should sound familiar to Schwarzenegger. He swept into office on a wave of voter discontent when his predecessor, democrat Gray Davis, failed to pass a budget. Schwarzenegger promised to fix the political impasse and cut taxes, especially the much-loathed vehicle tax, which he bid "Hasta la vista, baby," at a jubilant public ceremony.

Five years later, the deficit has mushroomed and Schwarzenegger now says new taxes are necessary - maybe even that despised car tax.

"This is a critical time in California's history," Schwarzenegger said recently. And on that, all sides can agree.