California, the Golden State, the eight biggest economy in the world, proud of its services, a pace-setter and innovator, has finally adopted a budget after a nine-week political struggle.

The travail almost certainly will be repeated, there and in other states. The era of budgetary trench warfare has barely begun.

Gov. Pete Wilson signed California's new budget early last Wednesday, and officials hurried to market Thursday morning to sell $3.3 billion of notes. Their aim was to raise enough money to start payment bills with cash instead of registered warrants, the embarrassing IOUs that only emphasized the state's sorry performance.

Squabbling ineffectively for two months and issuing IOUs is not exemplary behavior for high-grade bond issuers, but will become more commonplace for the next several years. Bondholders must be increasingly wary.

The problem stems from economic sluggishness, adamant voter disapproval of tax increases, and entrenched demand for government services. Something's got to give, but the process ain't easy.

In completing its $57.5 billion budget, California eliminated a $10.7 billion gap between revenues and expenses without raising taxes. Gov. Wilson was unwilling to increase taxes because he had already raised them $7 million a year ago to help erase a $14 billion deficit.

Some local property tax revenues were transferred to the state in the new budget, however, and many services will be cut.

When California finished its budget, there was little assurance the new numbers would work out. Personal income tax revenues are already running 10% below expectations, during to the state's Department of Finance.

The economy remains spiritless with nothing in sight to take the place of the military spending no longer needed since the end of the Cold War. Six months from now, more tax cuts and revenue increases or some combination of the two may be required.

All this fiscal pushing and shoving is difficult fare when California, and other states as well, wants to increase investment in education, infrastructure, research and development, and new technology. The messy business of budget battles comes at a time when citizens are demanding lower health-care costs and are concerned with crime, drugs, the homeless insane, and pollution.

Money would help, but it is tricky to find these days and probably will be for a while. Business activity is unlikely to expand more vigorously any time soon, and taxpayers are obdurate.

In these hard times, investors are right to question bond issuers closely, to see that governments are businesslike as they tax and spend.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.