Out of money, the eighth-largest economy in the world halted $3.5 billion worth of payments on Monday. The years of plenty are clearly over. Now, for thousands of Californians, the famine years have arrived. California has begun stiffing its citizens.

With the economy contracting, record numbers losing their homes, and 13.8 percent more people on food stamps than were last year, the state’s decision could hardly have come at a worse time.

Taxpayers, contractors, social service agencies and counties across the state are currently dealing with the news that government checks will not be arriving—at least for now. Instead, the state has chosen to continue funding its school system and making its debt payments to its domestic and foreign creditors.

Taxpayers are angry. The $2 billion in personal income tax refunds being held up does not even really belong to the state. This is money that in many cases was overpaid. Additionally, $515 million in payments belonging to state vendors is being blocked, along with $280 million more that goes to help people with developmental disabilities. Other public assistance agencies are also left waiting for hundreds of millions more.

Already horribly in debt, California is facing a budget deficit of approximately $42 billion through 2010. To fix this gargantuan overspending tab, Gov. Arnold Schwarzenegger is proposing to slash spending by $17.4 billion, increase taxes by $14.3 billion, and borrow the rest (around $10 billion).

It is hoped that if state politicians can pass a feasible budget plan, it will encourage the credit markets to open up and provide funding for the state. Currently the state is locked out, and lenders seem unwilling to finance a state that is projected to go so far into the red. Today, the Standard & Poor’s Ratings Services cut the state’s credit rating down one level, from A+ to A. Despite the downgrade, the A rating should not be taken to mean that the state is economically healthy. It just means that S&P feels that there is enough money still left within the state to be taxed so the government will be able to meet its current debt payments—if politicians can pass a workable budget.

According to Schwarzenegger, half the budget problem is a result of the global recession and the other half is “self-inflicted.” It’s “bigger than any problem we have ever had in this state,” he said.

Much of the half that is “self-inflicted” is due to massive government spending incurred during the housing bubble years. Governments seem to have projected never-ending revenue growth based on ever rising property valuations, construction and lending activity. Thus politicians figured that ever increasing spending could go on forever too.

Politicians promised so much that, according to the Mercury News, Governor Schwarzenegger could fire every single California civil servant and still not come close to balancing the budget! Even if he also fired the other 149,000 legislative aides and people who work for the state’s courts or university systems (people not directly under the state’s control), he still couldn’t eliminate the deficit.

Alternatively, Schwarzenegger could close every single state prison, fire the guards, release all the prisoners—plus cut off all funding for health care across the entire state—and still be billions in the hole.

Not a very nice scenario to contemplate. But unfortunately, it is the scenario facing lawmakers and taxpayers in a state that was once arguably the wealthiest in the nation.

For information on why California is cursed with so many social, environmental and economic problems, read “Is California Under a Curse?” and “The California Dream Is Dead.”