Even in such dire circumstances, Schwarzenegger said California can emerge more efficient and fiscally stable if lawmakers take steps to restructure government and rethink the services it provides with the revenue it has.
"We can only spend what we have. That is the harsh but simple reality," he said in the rare midyear appearance before a joint Legislature session. "Our wallet is empty, our bank is closed and our credit is dried up."
The governor spoke just four months after he and lawmakers agreed to a two-year budget package that was intended to close a deficit of $42 billion through mid-2010. Declining tax revenue and overly optimistic assumptions about the tax increases they approved in February reopened the state's deficit.
Schwarzenegger said state tax revenue has dropped 27 percent from last year and has returned to 2003 levels.
Controller John Chiang warned legislative leaders last week that California will run out of money to pay its bills on July 29. He called for a balanced budget by the June 15 constitutional deadline so the state can access short-term loans in a tight credit market.
Its new fiscal year begins July 1. "California's day of reckoning is here," Schwarzenegger said.
He has outlined a series of cuts that include an additional $5.2 billion reduction in funding for public schools, laying off 5,000 state workers and further cutting the pay of 200,000 others. He has proposed eliminating welfare for 500,000 families, terminating health coverage for nearly 1 million low-income children and closing 220 state parks.
"People come up to me all the time, pleading 'Governor, please don't cut my program.' They tell me how the cuts will affect them and their loved ones," Schwarzenegger said. "I see the pain in their eyes and hear the fear in their voice. It's an awful feeling. But we have no choice."
The Republican governor and legislators of his own party say they will not raise taxes, after agreeing to $12.8 billion in higher sales, personal income and vehicles taxes earlier this year.
The Democratic leaders of the Assembly and Senate pledged to work quickly to resolve the deficit but said they would resist cuts that would wipe out vital programs, particularly those for children and the poor.
"This is going to be traumatic to a lot of programs and a lot of people, but we are committed to avoiding the wholesale elimination of major investments that matter to the people of California," said Democratic Senate President Pro Tem Darrell Steinberg.
In the May special election, voters rejected all five budget-related measures placed on the ballot by Schwarzenegger and legislative leaders. Revenue has continued to plummet as residents have reduced spending and unemployment has soared to 11 percent.
Democratic lawmakers and the Schwarzenegger administration have even inquired about having the federal government give California a loan guarantee, an unprecedented step that is seen as way for the state to lower its borrowing costs.
Chiang, the state controller, said Tuesday that such a guarantee appears unlikely but said U.S. Treasury Secretary Timothy Geithner has indicated the administration wants to help.
He also advised anyone who thinks Schwarzenegger is bluffing about the severity of the crisis to think again.
"They ought to stop denying it," Chiang said. "This is the worst economic cash situation here in California since the Great Depression."
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