The state faces a $28 billion budget shortfall over the next two years. If nothing is done, nearly $5 billion in public-works projects could be halted in little more than a week for lack of bond sales – everything from bridge replacements to a new highway tunnel and billions of dollars' worth of school construction, according to state Treasurer Bill Lockyer.
Already, the state failed to attract enough buyers three weeks ago to sell all of the bonds it had floated, he told state lawmakers Monday. "Expecting investors to purchase our bonds now, when we can't agree on a budget that lenders can rely on, is like expecting someone to buy a stock when they know it's losing value," said Mr. Lockyer.
He and three other state finance officials testified Monday in a rare joint session of the legislature.
The picture worsens next spring if legislators don't pass some plan to increase revenues or cut spending or both. California will run out of operating cash in March, state controller John Chiang told the lawmakers. The recession has severely squeezed state tax revenues.
Normally, the state would borrow to cover any shortfall. But internal revenue sources have already been depleted and outside lenders are less accommodating.
"It's not because of [California's] economy, because it's deep and diverse," says David Hitchcock, primary credit analyst for California with Standard & Poor's. "It's because, financially, they've had budgets that have not proved realistic. They've had large deficits and they've only been able to pay for their budgets through borrowing for the last couple years."
Mr. Chiang said the state may be forced to seek special loans at exorbitant rates or issue IOUs to state workers and vendors, further damaging the California economy.