Down and out in California: has the sun set on the golden state?

When times were good, California had it very, very good indeed. The state drove the technology boom of the late 1990s, turning San Francisco, San Jose and Los Angeles into gleaming citadels paved with stock-option gold and callow dot.commers in their early twenties into instant millionaires. Making money on the West Coast became almost as easy as having sex in the counter-cultural heyday of the Vietnam generation.

The state had money to burn, and it built new schools, reduced class sizes, expanded public health facilities, approved new roads and added about 40,000 public service employees to the state payroll.

That was then. Now, like a drunk waking up in a bleary haze after a heavy late-night binge, the picture suddenly looks very different. California is not just suffering the cruel blows of a nationwide recession. It is, in a word, broke.

Quite how broke is a matter of some speculation. According to the official legislative analyst, the state is about $21bn (£13bn) in the red for this budgetary year, and is likely to see annual deficits of $12-15bn for the foreseeable future, whether or not the economy improves. But even that grim assessment may be over-optimistic.

California's recently re-elected governor, Gray Davis, has said the true figure for this year may be as high as $30bn. Some economists are putting it higher still, at about $36bn.

What do those figures mean? As Herb Wesson, the speaker of the state assembly, put it: "That's a hole so deep and so vast that even if we fired every single person on the state payroll -- every park ranger, every college professor and every Highway Patrol officer -- we would still be more than $6bn short."

It is often said that California has the fifth biggest economy in the world, bigger than France's, bigger than Italy's. Unlike France or Italy, though, it is not its own country, which means it doesn't print currency or exercise absolute taxing authority.

That, in turn, means that it can't run budget deficits. In fact, deficit-spending is prohibited under the state constitution. And that, in turn, means some very painful decision-making.

California's schools, already so woefully underfunded that they rank 38th among American states for per capita spending, are likely to be devastated, with the worst impact felt in under-resourced inner city areas like South Central Los Angeles and Oakland. There is talk of firing up to 35,000 teachers.

As many as a million people could lose their health insurance benefits as California narrows the eligibility criteria for a state coverage programme known as Medi-Cal. Hospitals have already begun closing in impoverished areas dependent on state aid.

The simple reason for this calamity is the economy. Until the tech boom started to turn to bust in March 2000, California was merrily raking in corporate taxes from countless internet, telecommunications, computer hardware and software companies, many of them based in Silicon Valley and the greater San Francisco area. As an added boon, it was earning revenue on every stock option issued to employees – real money created out of what turned out to be little more than a useful illusion.

Now many of those firms are gone. In San Francisco alone, almost 30 per cent of office space lies vacant. State revenue from capital gains and stock option taxes has fallen over the past two years from $17bn to an estimated $5bn, accounting for roughly half of the current deficit all by itself.

There are also more complex reasons why the state budget has see-sawed so wildly. Being a liberal-minded state, California has an unusually progressive tax structure, which means that the top 10 per cent of earners pay 75 per cent of the income tax. When the dot.coms went up in smoke, pushing tens of thousands of well-paid programmers and marketing executives out of work, it dealt a very tangible blow to the state pocketbook.

Moreover, the budget has become particularly vulnerable to the general economic cycle because of specific restrictions on its powers of taxation. A successful anti-tax revolt in the late 1970s permanently capped the state's ability to raise property taxes – a calamitous move, in the opinion of most economists, that sabotaged one of America's most successful school systems and slashed social services. The property tax cap also removed a vital element of fiscal stability, since it made the state disproportionately dependent on income tax.

The crisis has, of course, been creeping up gradually, but during the long campaign leading up to the November elections, Mr Davis did his best to pretend the problem did not exist. The deficits were artfully concealed, thanks to one-off debt-restructuring tricks and money borrowed from anticipated future revenues, notably from the 1998 settlement between all US states and the tobacco companies, worth more than $200bn across the board.

Over the weekend, Governor Davis at last prepared the electorate for the painful times ahead with an initial round of mid-year budget cuts worth more than $10bn. Since education accounts for roughly half of the budgetary general fund, that is where the most painful cuts will be made. The University of California stands to lose $75m, the state's public schools almost $2bn.

Even in affluent school districts, principals have been asked to put 25 per cent of their teaching staff in the firing line. The cleaners, gardeners, nursing staff and psychological counsellors have, in many cases, been given their marching orders already. Parents at many schools have been told to put a toilet roll in their children's backpacks, because schools will not be providing their own any more.

If anyone is enjoying California's pain, it is the Bush administration and the Republican Party, which is in the minority in the state assembly and does not hold a single executive position at state level. Republican state lawmakers are refusing to offer their support for general tax increases, which require a two thirds majority under California's constitution.

The federal government, meanwhile, is playing hardball on everything, from education funding to transport infrastructure to programmes to help poorer children.

That has been offset partly by money for weapons research at California laboratories and some assiduous courting of the remaining hi-tech giants in Silicon Valley. That, though, won't help the bulk of Californians, who either depend on the state for their day-to-day services or else turn to rich local residents – if they have any – to volunteer their own money, especially for schools. "Investment is desperately needed in many areas, like education, which is now crumbling," Kent Sims, a prominent San Francisco economist, said. "If you're a rich district, you still have options. If you are poor, you don't."

CALIFORNIA DREAMIN': THE WORLD'S FIFTH BIGGEST ECONOMY

• California is the most populous state in the union, with 35 million residents.
• It is by far the richest. If California was a country, it would be the fifth-largest economy in the world, surpassing France and Italy.
• California is effectively a one-party state. Democrats hold every state-wide office including both seats in the US Senate and the governorship.
• California has produced two American presidents, both of them Republicans: Richard Nixon and Ronald Reagan.
• Silicon Valley broke all global records for capital investment during the high-tech boom of the late 1990s and was arguably the richest place on the planet.
• California's Central Valley is the most productive farming region in the US.
• Los Angeles is the largest, most populous county in the US, with nine million residents.
• According to the most recent census, California is now majority non-white. Roughly one-third of the state is of Latino descent, 7 per cent are black and the rest are Asians and Pacific islanders.
• Spanish is the state's second language, and in many farming communities, people speak nothing else.
• California also led the country in imposing caps on property taxes, with the passage of the now-infamous ballot initiative called Proposition 13 in 1978. As a result, spending on schools plummeted from first place in the US to 38th.
• San Diego is said to have the best climate in the world, with even year-round temperatures.
• California has more golf courses than any other state, many of them at Pebble Beach, near Monterrey.