Schwarzenegger can't terminate California money woes

By Jim Christie and Peter Henderson - Analysis

SAN FRANCISCO (Reuters) - Staving off California's financial meltdown will be the toughest role ever for Hollywood hero Arnold Schwarzenegger as he enters the last 18 months of his governorship.

The most populous and often trend-setting U.S. state has racked up a $26.3 billion budget gap -- about a quarter of its total annual spending -- and could run out of cash this month if its books are not balanced.

Financial woes in California, home to both Hollywood and high-tech hub Silicon Valley, are so severe that some state officials have begged Washington for financial aid.

The state is resorting to issuing "IOU" notes to preserve its dwindling cash -- essentially promises to pay money owed to vendors and local agencies, including ones overseeing health programs and financial aid to the elderly, the blind and college students.

The vast majority of U.S. states face budget shortfalls as the economy crumbles, and nearly half also have divided rule, where control over the governorship and legislature is split between the Democratic and Republican parties.

Short on cash despite boasting the world's eighth-largest economy, California stands alone in the extent of its fiscal turmoil and the complexity of its government.

"All states are unique, but California is more unique," said Tim Storey, an analyst with the National Conference of State Legislatures.

Schwarzenegger, a Republican, is best remembered from Hollywood as a human-killing Terminator machine but he came into office promising to bring stability to the state's finances. It hasn't worked.