No easy scenarios for California budget crisis

By Jim Christie

SAN FRANCISCO (Reuters) - Tom Campbell aims to become governor of California after serving as the state's finance director, arguably the kind of job experience the state's cash-strapped government could use in its top office.

But there are no easy scenarios that will lead to a resolution of the state's budget crisis, Campbell said in an interview on Thursday.

Recession and rising unemployment are hammering California, the world's eighth-largest economy, and have opened a historic $26.3 billion state budget gap.

The deficit could be plugged if state leaders truly feared the state tipping into a financial abyss, said Campbell, who also has been a state lawmaker, U.S. House representative and University of California, Berkeley business school dean.

Instead, talks between Governor Arnold Schwarzenegger and lawmakers over closing the budget gap have ground to a halt amid partisan bickering, Campbell told Reuters.

"Right now it's at a stalemate ... It's really depressing," Campbell said as California entered the second week of its fiscal year without a balanced budget.

Campbell said he is especially concerned about more budget turmoil arising from the state issuing "IOUs" promising payments to vendors and for tax refunds. More than $350 million of the IOUs have been issued since July 2 in an effort to preserve the state's dwindling cash for priority payments, including to investors holding state debt.

But Campbell, who had served Schwarzenegger as his second finance director, sees the IOUs triggering lawsuits compounding the state's already messy budget troubles.

FEDERAL COURT INTERVENTION

Campbell, who holds a doctorate in economics and a law degree, said if major banks no longer accept the IOUs after Friday as they said they would, lawsuits are certain.

With bank windows closed, IOU recipients may need to turn to check-cashing shops or a secondary market some entrepreneurs aim to create for the warrants. They would charge fees or demand discounts, costs to recipients that federal judges would almost certainly decree unfair, Campbell said.

"After Friday there will be no readily available way to get 100 cents on the dollar," said Campbell, whose rivals for the Republican bid for governor include former eBay Inc CEO Meg Whitman and Insurance Commissioner Steve Poizner.

Campbell said he expects U.S. judges would intervene in the state's budget mess by ordering the state to sell properties to make IOU recipients whole. That could help the state prop up its finances -- for the time being. The state also could lease buildings and pocket windfalls. However, its long-term financial problems would remain, Campbell said.

Another scenario he sees is Schwarzenegger and lawmakers, already in agreement that most of the budget gap will be covered by deep spending cuts, balance the state's books with a "plug."

THE 'PLUG' AND OBAMA SCENARIOS