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How Arnold Schwarzenegger Lost To The 'girly Men'

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http://business.timesonline.co.uk/tol/busi...icle5688885.ece

Arnold Schwarzenegger has never been one for introspection but even the irrepressible Governor of California must be slightly regretting his decision in 2004 to disparage economic doomsayers as “girly men”.

With America's most populous state mired in the worst budget crisis in its history, brought down by a combination of rising unemployment, plummeting house prices, troubled financial markets and the peculiarities of its own legislature, it appears that the economic girly men were right to be worried. This weekend the Governor and Californian lawmakers were locked in negotiations, desperately trying to agree a budget that will cover a $42billion (£28.4billion) deficit in the state's finances over the next 18 months.

The weekend's discussions were the culmination of four months of arguments over the combination of tax increases and spending cuts that must be made to balance the books. Democrat members of the legislature have resolutely opposed cuts to social services, while Republicans have fought increased taxes and the former Terminator, without a sufficient majority to push a budget through, has been unable to broker an agreement.

Stephen Levy, chief economist at the Center for Continuing Study of the California Economy, held out little hope of a breakthrough. “They've been close to a deal for weeks so no one's holding their breath,” Mr Levy said. “It's embarrassing.”

Without a truce, the state will go bust this month. John Chiang, the state's controller, said that California had been borrowing from internal reserves and Wall Street to pay its bills but that its avenues for loans had been exhausted. The credit crisis means that banks have little taste for lending to a financially imperiled state.

Unless a budget can be passed, this month there will be a $346million shortfall between the money the state has and the funds needed to pay for services and operations.

In an attempt to stave off a crisis, California has implemented some dramatic initiatives to conserve cash. Last Friday more than 200,000 state employees started taking monthly unpaid, two-day holidays that Mr Schwarzenegger hopes will save $1.4billion by June 2010.

The centre of Sacramento, the state capital, was nearly deserted on Friday as workers from agencies, including healthcare services, stayed at home. Matthew Mahood, president and chief executive of the Sacramento Metro Chamber, said: “The lack of a state budget is placing local businesses and the jobs they create at risk.”It has also cut funding for more than 5,000 construction projects.

Struggling Californians also cannot rely on tax refunds to help to make ends meet. Refunds will be at least 30 days late this month because the state needs the money for more vital services. This was part of a plan by Mr Chiang to save $3.5billion over seven months by holding back payments for various social services, including those that cover food stamps and rent assistance for the poor.

Bill Lockyer, California's treasurer, admitted on Friday that the state's finances were “disgraceful”. But he insisted that bondholders need not worry because they, alongside state schools, were the first in line to be paid under the Californian constitution.

Such assurances did not stop Standard & Poor's (S&P) from lowering California's rating last week from A+ to A, the lowest credit rating of any US state. Gabriel Petek, an S&P credit analyst, said long-term hope lays in the possibility that California would receive as much as $30 billion as part of President Obama's stimulus package.

California has been hit hard by the recession. Unemployment stood at 9.3 per cent in December, the most recent monthly figure available from the Bureau of Labor Statistics, compared with the national average of 7.2 per cent. This is partly because California attracts large numbers of immigrants.

Personal income tax provides more than half of the revenue that California needs to pay for services, but fortunes of the multi-millionaires of Hollywood and Silicon Valley have been eroded by falling markets. “California collects a disproportionate amount of that income from wealthy taxpayers so when wealthy people are suffering investment losses as they are now, revenues drop dramatically,” said Douglas Offerman, senior director of Fitch Ratings.

California's property boom also outstripped those in other states and it has suffered some of the worst price falls in the country.

So the 'girly men' won then?

It's certainly the best headline I've read today.

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