The state has been running out of money for over a year. It began making deep cuts in spring 2009 and has in total reduced spending by some $30 billion over two fiscal years to schools, colleges, health care, welfare, corrections, recreation and more.
In May, California voters soundly rejected five of six ballot measures designed to keep the state solvent through the rest of the year. The Legislature and the governor then failed to break their deadlock by a budget deadline of July 1. As a result, the state ran out of cash. The state's controller began printing i.o.u.'s in lieu of cash to pay taxpayers, vendors and local governments. California lawmakers, their state broke and its credit rating shot, finally sealed a deal with Mr. Schwarzenegger on July 20 on a plan to close the $26 billion budget gap.
At no point in modern history had the state dealt with its fiscal issues by retreating so deeply in its services. The deal contained $15.6 billion in cuts, about $2.1 billion in borrowing, $3.9 billion in new revenues and about $2.7 billion in accounting maneuvers like shifting a payday into the next fiscal year, which Gov. Schwarzenegger had claimed he would not brook.
Despite the cuts the state was back in preliminary discussions in January 2010 on how to close a projected $20.7 billion deficit for the fiscal year that begins in July 2010. State officials were pledging to push hard for as much as $8 billion from the federal government.
Source : http://topics.nytimes.com/topics/news/national/usstatesterritoriesandpossessions/california/budget_crisis_2008_09/index.html
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