Calif. officials warn financial doom is near

updated 7:26 p.m. ET June 24, 2009

SACRAMENTO, Calif. - To hear Gov. Arnold Schwarzenegger and state finance officials tell it, July 28 is California's last stand before fiscal Armageddon.

Top financial officers say that's when the state will run out of cash to pay its daily expenses unless lawmakers pass a balanced budget.

Schwarzenegger has warned that government will come to a "grinding halt." The state controller describes "a meltdown."

But what exactly will happen just five weeks from now is less clear-cut than the dire pronouncements suggest.

California government will not come to a dead stop: Police will still patrol the highways. Prisoners will still be guarded, and state firefighters will stand ready to put out wildfires.

Still, many services normally funded by the state, such as road projects and community health clinics, would either stop or get cut back.

Social programs, students threatened
Counties may not have money to run a wide array of social programs. College students who rely on state assistance might have to pay their own fees or consider leaving school.

Dr. Gilbert Simon, owner of the Sacramento Family Medical Clinics, said he could go out of business, forcing his patients to find care elsewhere.

"Anyone who relies on income from a functioning California government is at risk," said Simon, whose facility is the largest privately run health clinic in the region and relies on reimbursements from Medi-Cal, the state version of the federal Medicaid health program for the poor.

California considers Medi-Cal a priority payment, but that does not comfort Simon. The state has reduced payments to his clinic in past years, and he worries that this year's fiscal crisis is so acute that he will not get paid at all.

How did California arrive at this point? The state's budgeting system was strained by years of overly exuberant spending. Then the recession caused a sharp drop in sales and income tax revenue.

Projected $24 billion deficit
The result: California's general fund, the state's main bank account, has a projected $24.3 billion deficit for the fiscal year that begins July 1. By the end of July, incoming cash will fall below the state's payment obligations if lawmakers do not enact a balanced budget, either by slashing spending, raising taxes or doing both.

By September, California could be $6.5 billion in the red.

In February, Schwarzenegger and the Legislature adopted a budget for the new fiscal year that was supposed to stabilize California's finances through mid-2010, but a precipitous plunge in tax revenue put the budget out of balance within weeks.

Revenue from personal income taxes, for example, fell by 34 percent for the first five months of the year, compared with the same time last year.

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