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article imageObama Administration not going to bailout California yet

By Matthew Moran     Jun 16, 2009 in Politics
Even though the state of California may only be weeks away from a fiscal meltdown, the federal government is holding off on a bailout. At least for now.
California, which boasts the eighth biggest economy in the world, is facing a $24 billion budget shortfall and could enact massive cutbacks to close that gap. Some, including U.S. Representative Zoe Lofgren, believe that could harm the state's economy and stifle the entire country's economic rebound.
"This matters for the U.S., not just for California," Lofgren told the Washington Post. "I can't speak for the president, but when you've got the 8th biggest economy in the world sitting as one of your 50 states, it's hard to see how the country recovers if that state does not."
The state's controller said last week that the state could be "less than 50 days away from a meltdown."
The White House and the U.S. Treasury Department aren't convinced though. Top administration officials are concerned that if the federal government bails out California, many more states may come calling for fiscal help.
That concern has the Obama administration taking a wait and see approach. They have not ruled out the possibility of helping California.
Treasury Secretary Timothy Geithner said before Congress that "a lot of the burden" should be placed on California, but he also did not rule out possibly helping the troubled state.
There may be more seeing, than waiting in the future though. Governor Arnold Schwarzenegger issued a stern warning Friday: "After June 15th, every day of inaction jeopardizes our state's solvency and our ability to pay schools and teachers and to keep hospitals and ERs open."
Out of control
California's budget problem has seemingly spiraled out of control over the last several weeks. The state Constitution puts severe limits on taxes, but has a relatively large and expansive social budget.
As the economy turned sour last year, California saw steep declines in tax revenues. The state relies heavily on the sales of stocks and other financial assets, which have also been hurt seriously by the fledgling economy.
The shortfall was projected in February at $42 billion over the course of two years. After wrangling in the State Legislature, a tax increase was approved only to be rejected by the state's voters.
The end result is a $24 billion shortfall.
Because of the state's inability and voter's refusal to raise taxes, Governor Schwarzenegger has chosen to concentrate on major budget cuts.
Part of that plan will cut out entirely the state's welfare program, which covers 1.3 million Californians.
Consequences
Top state officials are pressing the administration to go-ahead with the bailout, to save the rest of the country.
"A fiscal meltdown by California or any other large state or municipality would surely destabilize the U.S., if not worldwide, financial markets," state Treasurer Bill Lockyer wrote to Geithner, as quoted in the Washington Post. If the state were to default, it could shake bond markets and undermine investor confidence in a still-fragile financial system."
The state could run out of money by late July and that will leave the Geithner, Congress and President Obama with a tough decisions to make.
More about Obama, Fiscal crisis, California, California bailout
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