California is (still) sliding towards an insolvency event of some sort. Their budgetary and legislative issues are insurmountable. Making the drastic cuts necessary is a near impossibility, and jacking up taxes on the beaten-down public is equally untenable.

Now the WSJ reports that the Governator is seeking $6.9b in Federal funds. Arnold is threatening to slash welfare spending, medicaid, and other social programs (he has made similar threats before, as I noted in May ‘09).

Try to imagine, for a second, what would happen if California halted welfare payments, or food stamps. It’s safe to say that things could escalate quickly.

From the WSJ (01/07/2009):

Republican Gov. Arnold Schwarzenegger asked for $6.9 billion in federal funds in his state-budget proposal Friday and warned that state health and welfare programs would be threatened without the emergency help.

Mr. Schwarzenegger’s proposed $82.9 billion general-fund budget for the 2010-11 fiscal year would close a $19.9 billion gap over 18 months. In addition to the federal aid, he called for $8.5 billion in cuts and $4.5 billion in alternative funding to balance the budget.

‘It’s time to enact long-term reforms that will change the way the most populous state and the federal government work together,’ Mr. Schwarzenegger said. He and state legislative leaders plan to visit Washington to lobby for bailout money. White House budget officials weren’t available for comment on the governor’s request.

Mr. Schwarzenegger said that without the federal aid, he would propose cutting $4.6 billion from state assistance programs and raise another $2.4 billion, largely by extending the suspension of tax breaks.

Default Inevitable?

The last time an American state defaulted on their debt was in the 1840’s, as Bill Watkins notes in What Happens When California Defaults? (must-read). Watkins, who has a Ph.D in economics from UC Santa Barbara, thinks default is the most likely outcome. Here are his thoughts on the fallout:

We’re left with the question: what happens when California defaults? 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.