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California Budget Crisis Diaries: State’s public debt is $68 billion

It’s all about the future in this California Budget Crisis Diary entry — the future of California’s deficit and the future of some politicians — and it’s topped off with some criticism for Gov. Arnold Schwarzenegger.

California going default: The Golden State may have to soon admit that it’s not so golden.

According to a column written by Bill Watkins, the executive director of the Center for Economic Research and Forecasting at California Lutheran University, for PublicCEO.com - different things may happen if the state government decides it can no longer pay its creditors.

“The worst case would be the mother of all financial crises. According to the California State Treasurer’s office, California has over $68 billion in public debt, but the Sacramento Bee’s Dan Walters has tried to count total California public debt, including that of local municipalities, and his total reaches $500 billion.

“Whatever the amount, the impact of default could be larger than the debt amount would imply. Other states - New York, Illinois, New Jersey, for example - are in almost as bad shape as California, and they could follow California’s example. The realization that a state could default would shock markets every bit as much as when Lehman Brothers failed. Given the precarious state of our economy and the financial sector, another fiscal crisis would be disastrous, with impacts far beyond California’s borders.”

California may also see higher interest rates. Watkins writes though, that “in a sense,” California has already defaulted because it issued IOUs in the past months. However, because “banks were willing to honor the vouchers [or IOUs],” a major financial blow didn’t occur.

Watkins ends his thoughts with a call to action on state politicos.

“Given California’s recent history, it is difficult to believe that the people with the authority and responsibility for California’s finances can act responsibly, but that is what we need. Responsible action would be creating a gimmick-free budget that places California finances on a sustainable path, and provides an environment that allows for opportunity and job creation.”

Budget + Election = Trouble for Legislators: Some California lawmakers may be putting off tough budget decisions to save their political careers.

An analysis by the San Jose Mercury News show that the dozen or so senators and assemblymembers up for re-election may find it harder to win their seats because of the budget woes that have hit California these past couple of years.

“While the elections won’t fundamentally transform a legislative landscape in which most seats are safe for incumbents, the politicking may make it harder to secure the thin bipartisan margins where budget compromises are hammered out.

Expect even more gridlock than usual, experts suggest, as lawmakers punt a host of difficult deficit solutions for as long as they can in hopes of denying their foes ammunition.”

The Mercury reporter uses the infamous recall of former Gov. Gray Davis as an example of how budgetary problems affected a politician’s career.

“A month after the November 2002 election, lawmakers were called back for more cuts, after Davis acknowledged that billions in projected solutions were unlikely to materialize. The next year, the deficit ballooned past $34 billion, and Davis was ousted in a recall.”

Calling out Schwarzenegger: A reporter from The Examiner is criticizing Schwarzenegger for a comment he made on CNN’s State of the Union.

On Sunday, Schwarzenegger cited several problems facing California and its general fund and also called the federal government for assistance.

“We, for instance, in California have a major problem still this year,” Schwarzenegger said. “We have another $20 billion deficit. And that’s, of course, huge, because we already, you know, last year had a $60 billion deficit or I should say — I should say this year, actually, and next year we have a $20 billion deficit.

So I think we have still a major problem and still have to deal with those things. And I think that we have to tighten our belts. We have to also ask the federal government to pay up, you know, what they owe us, because the federal government, let’s not forget, we don’t need a bailout from them, but we need for them to pay, because it’s inexcusable, for instance, in California, where we have — we pay approximately $1 billion for the incarceration of undocumented immigrants and we get $100 million from the federal government. And now they even voted not to get us any money.”

In The Examiner, J.P. Freire writes that Schwarzenegger failed to cite other problems - like himself.

“To suggest that the reason for California’s budget crisis is even remotely the consequence of bad immigration policy may have a certain ring to it, but it falls flat on its face. Approximately a billion dollars may sound like a lot. But welfare and MediCal cost the state $57 billion. And given the state’s steeply progressive tax rate, recessions hit the state particularly hard.

Of course, Schwarzenegger is partly to blame for the eventual realization that the cost of health care reform to California is $3 billion — he backed the effort despite CBO report after CBO report showing the high costs.”

Hoa Quach is the political editor for the San Diego News Network. Follow her on Twitter.