"IS California too big to fail?
That’s the question President Obama and Congress will soon face. While many states have severe fiscal problems, the depth and unusual persistence of California’s budget problems — the state has run deficits for most of the decade — has emptied Sacramento’s till. On its current path, California will run short of the cash it needs to pay its bills in late July.
It’s highly unlikely that the state’s political leaders will be able to fix the problem themselves. Typically, states build up a cushion of tax revenues in the spring to pay expenses through the fall, when little cash comes in. But enormous drops in tax revenue have left California without the savings to meet even one month’s worth of expenses.
The other methods of cash management — transfers to the general budget from other state accounts and short-term borrowing in the credit markets — are no longer enough to address the problem. California’s leaders have drawn so deeply in recent years on the state’s hundreds of special funds that there is little cash left to repurpose.
And selling short-term notes in the credit markets is difficult because of California’s credit rating, the lowest of any state. Even if the state could pay high interest costs, California may require more cash — more than $20 billion by some estimates — than it can plausibly acquire in the markets."
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