Things are not looking good for the California state pocketbook. Maybe it’s time for Schwarzenegger to do a comeback movie and gather a little extra spending money for a state that has a larger economy than most countries around the world.

The Governator declared a fiscal emergency today, a move that will force the hands of state lawmakers to do something about the massive budget deficit. Schwarzenegger perhaps declared the emergency because California began the new fiscal year today with no clear plan of how to deal with the budget deficit.

How big is that deficit? Well, big like $26.3 Billion big. That’s pretty big.

California is already seeing healthcare, education and public service cuts at the state level to deal with some the financial issues- so what gives next?

Well for now payments to vendors and local agencies will get IOU’s instead of payments from the state. Hopefully those IOU’s will work at Safeway.

"Though the legislature failed to solve our budget problem yesterday, rest assured that solving the entire deficit remains my first and only priority, and I will not rest until we get it done. I will not be a part of pushing this crisis down the road -- the road stops here," said Schwarzenegger in a statement.

But why does California have this deficit anyway? Isn’t there a ton of money in the state? Well, according to Reuters, this year’s drop in personal income tax revenue is the worst since the Great Depression, and the housing slump isn’t helping matters either.

As for the politicians involved, no real surprises. The Republicans want to cut spending and the Democrats want to raise taxes.

State Assembly Majority Leader Alberto Torrico (D) is defiant of Schwarzenegger’s declaration, saying,"He can issue as many edicts as he wants. We're going to keep sending it to him until he signs it."
In the middle of summer Sacramento is brutally hot and temperatures in the political halls are rising- IOU’s have not been used for 17 years.

"California has never defaulted on its debt obligation and we don't plan to do so," said California State Controller Chiang. With that in mind, Bank of America has said that it will accept IOUs for a while- until July 10. If the crisis is not resolved, vendors, local elderly services, and college students with state aid may receive the IOU’s. The state may pay out $3.36 Billion in IOU’s this month.

Wow.

The White House is monitoring the situation but not stepping in, and California is not asking for a financial bailout, just a guarantee on their debt.
Meanwhile, California’s “general obligation debt” has been downgraded to an A-, the lowest rating of any state in the Union.

California needs to sell $7-9 Billion in short-term debt as soon as there is a budget agreement, so having Wall Street believe that the state will pay its debts is pretty crucial.

"Absent a credible budget revision package, we believe the state may suffer insufficient investor confidence in its finances to successfully place such an offering," said Standard & Poor’s.