Why is California almost bankrupt?

What is California's problem?
It's flat broke. In the original plan for this year's budget, spending exceeded revenues to the tune of $24bn. Unless the state can arrange a short-term loan of $10bn, America's most populous state will run out of cash on 28 July. True, states quite often need to borrow funds to see them through the first weeks of the financial year, but California's budget is so wildly out of wack (it has no ready cash to pay its bills) and its credit rating so low that no one on Wall Street will extend a loan on manageable terms, while Washington has so far refused to bail it out.

Is it one of the poorer states?
To the contrary, Californians have higher incomes than their fellow Americans in all but seven of the 49 other states. Were it an independent country, it would be the eighth largest economy on Earth. It has world-class universities and industries (Hollywood, wine, Silicon Valley) and is the world's fifth-largest maker of agricultural and food products. But the financial crisis has hit the state particularly hard. Unemployment is at 11.5 per cent; people are leaving in droves (the exodus is expected to exceed 200,000 by 2011); and there has been a calamitous decline in tax revenues.

What has Governor Schwarzenegger done about it?
First he imposed numerous austerity measures: civil servants have had to take two unpaid days off a month; billions of dollars in income tax repayments have been frozen; state prisons are so underfunded that a court recently ordered the release of 55,000 inmates to ease overcrowding. Programmes of infrastructure maintenance have all but ceased. But it wasn't enough, so in February, "Arnie" Schwarzenegger came up with a more drastic plan: further massive cuts and a $12.8bn tax hike. But as his plan (notably its proposed use of lottery money) required amending the state constitution, it had to be put to the voters, and in May they roundly rejected the proposal. Now it's crunch time: 1 July is the start of the state's fiscal year, so this week was the deadline for its lawmakers to agree a plan on how to balance the books.

So what happened this week?
Rebuffed on the tax front, the 'Governator' (as Arnie is known) has turned his back on tax rises and instead wants even deeper cuts - a 10 per cent reduction in the income of all state employees; cuts to school funding of $5bn; the sacking of firemen and policemen; an end to financial aid for university students; early release of tens of thousands of convicts; elimination of subsistence aid for one million children living in poverty; closure of 80 per cent of the state's parks. The state's Democrat-controlled legislature, however, while accepting the need