California’s governor, Arnold Schwarzenegger, has declared California to be in fiscal emergency.  California is suffering from a financial deficit causing Schwarzenegger to order the closure of state offices for three days a month to save cash.  The act of ordering non-work days to save money is called a furlough.  This new furlough will affect the pay of 235,000 California state employees.

California is suffering an enormous deficit, the sum of about $24.3 billion.  What caused the crash of the California budget?  Schwarzenegger might have underestimated the anticipated tax revenues from tax day April 15th.  California did not anticipate the abysmal tax income and it borrowed money against these over-estimated tax revenue projections.  Accordingly, last fall, California entered into $7 billion in short term loans anticipating to pay them back by April with tax revenues.

The bigger problem is the long term effect of the sharp drop in overall revenues, this includes sales tax declines as Californian’s purchasing slows down and the revenue from small businesses, which was lost to outsourcing or business bankruptcies.  Last year, State Treasurer Bill Lockyer, projected the 2008-9 budget to see a $4 billion shortfall.  Based on today’s estimates, Lockyer could not have estimated the increase in the current deficit for 2009-10, by about $20 billion.  It appears that the financial crisis in California is spiralling out of control at this rate. What’s more is that the deficit is expected to increase by $7 billion due to the California’s Legislature’s failure to enact several back fill measures last Tuesday.

California began its new fiscal year Wednesday without a balanced budget.  This has caused California to pay many of the state’s bills using IOUs totaling $53 million, which are expected to be sent out later.  State Controller, John Chiang, may also have to issue IOUs totaling $3.3 billion in July to cover other state debts. Schwarzenegger has given California law makers 45 days to come up with budget cuts to balance the budget.

Apart from tax revenue shortfalls, some experts attribute California’s financial crisis to its residents who have purchased overpriced properties that they could not afford, causing foreclosures and bank debts.  Also, California state regulations contributed to driving up land prices combined with excessive land-use regulation.

Earlier this month, Schwarzenegger asked president Barack Obama for financial help, Obama declined.  However, in the face of this new emergency, it is expected that talks between Schwarzenegger and Obama will resume and some sort relief could be arranged for California.

No word yet as to how the new IOU credits will be received by California’s creditors, but Bank of America has announced that it will honor and cash the state IOUs through July 10 to accommodate their clients.  Several social programs will be affected by the payment freeze, such as the state’s drug and alcohol counseling.