Today was the day when California's budget problems went from bad to worse.

Since legislators have yet to produce a solution to California's $42 billion dollar budget deficit, state money has now completely stopped flowing outward.

Declaring itself officially broke, the state government will begin issuing IOU's instead of check for grants, schools and any other organization or program which was previously receiving funding. Additionally, your California income tax refund check this year will not be sent out until after a balanced budget is passed. Those who have already filed their taxes will get an announcement noting the delay.

There may be some, especially Republicans, that take some schaudenfreude pleasure in seeing the great state bankrupt, but the 8th largest economy in the world doesn't go down in a vacuum. This will effect everyone in the world.

First of all, what does it mean when we say California is broke? The most publicized consequence is that residents of the state won't get their tax refunds. Another consequence is that college grants from the state will stop being paid out, thus threatening the future of students in the state.

However, the worst effects will be felt elsewhere.
It'll be felt at the county level.

Sacramento County officials estimate a $32.2 million loss per month due to California deferring health and social services payments, which started Sunday.

“This action would force us to take painful and drastic measures,” Mark Norris, internal services agency administrator, said in a news release. “We have the cash for one month without facing very serious financial complications. Any longer period of time would exhaust all available cash and we would not have the money available to pay our employees or our bills.”

Payments include most state programs mandated by state law, including local mental health, alcohol and drug payments programs. Public assistance for individuals and families would also be significantly reduced without state fund support. Additionally, payments to adult protective services, child protective services and in-home support services would be held up.

In other words, for the social safety net in California, this is like a neutron bomb going off. Medi-Cal payments have now been stopped.
Contrary to traditional conservative thought, the social safety net is not the root cause for California's ballooning budgets. Instead the heart of this dysfunction has a more easily identifiable source.

The fastest-growing segment of California's deficit-ridden budget, by far, has been its prison system, reflecting severe overcrowding, generous labor contracts and federal court pressure to reform inmate health care.

"Corrections," an ironic misnomer, has jumped from less than $5 billion a year to more than $10 billion in the last decade, over twice as fast as school spending, the biggest budget item. It now costs about $45,000 a year to feed, clothe and medicate each of the state's 170,000-plus inmates, or roughly five times what taxpayers spend on a typical public-school student. And that doesn't count what it costs to supervise tens of thousands of parolees.

California has the largest prison system of any state in America, with 171,500 inmates. This is largely due to harsh prison sentences for non-violent offenders, the famous 3-strikes law, and most of all, the parole system. The cost of the prison system has nearly surpassed the cost of funding higher education in the state.
It's a sad statement about priorities.

The budget problems also effects anyone who does business with the state.

In anticipation of state IOUs, contractors are cutting hours for subcontractors or idling them, scrapping equipment orders and hoarding cash, Berg said.

For some the measures may be too little too late. "If you've done $5 million worth of work and you're waiting for a paycheck, that'll put some of the biggest contractors out of business," Berg said.

This is, of course, the worst possible timing. The state economy is melting down, which causes the tax revenue to drop, which causes the state to not be able to pay its bills, which causes contractors who deal with the state to shut down, which causes the economy to melt down more, etc.
If the budget situation is not resolved this month, the California will begin defaulting on its debts.

The Governator has responded by making state workers take unpaid days off. This is a more symbolic gesture than anything else because even if the Governator fired every single worker in California, it still wouldn't balance the budget. However, it does add the number of people with a smaller paycheck in the state, thus slowing the economy further.

California has a $42 Billion budget shortfall, by far the largest of any state in the union. This is mostly due to the real estate bust. Along with Florida and Nevada, California was at the heart of a real estate bubble that left the orbit of reality several years ago.
The state's budget problems have now earned the state the dubious distinction of having the worst credit risk in the union. What this does is raise borrowing costs, forcing budget problems into future years.

The other factor of the budget stalemate has been the political side. Republican politicians have decided that now is the time to resurrect old partisan battles.

GOP lawmakers have tugged old battles over workplace rules and the environment into the historic winter budget talks now underway in the Capitol. From the position of the majority Democrats, who need at least a few Republican votes to pass a spending plan, it pays to listen.

Back on the table are some of the most hard-fought policy issues of recent years, won by Democrats and Republican Gov. Arnold Schwarzenegger: labor rules on overtime pay and work breaks, plans to clean up the dirtiest diesel construction equipment and California's curbs on greenhouse gases.

The California Constitution says that any budget must get passed by 2/3rd of the legislature. The Republicans have been in the minority for a very long time, but when it comes to budget time they hold nearly as much power as Democrats.

If a new budget proposal for spending caps is approved then the spending cuts would have to be nearly doubled.

California isn't alone in this crisis. A quick Google search will turn up news articles about massive state budget cuts from Nevada to New York to South Carolina.