Unless this is resolved, the poor and elderly may soon be among the main victims. For the past 48 days, the state has been without a budget. It has been compelled to issue IOUs to its many thousands of employees and other creditors because its Democratic-run legislature cannot agree on a cost-cutting package introduced by its Republican governor.
So far the impact has been limited, although the issue has generated considerable national interest because the idea of the Golden State going broke is considered, at the very least, unusual. But last week a federal appeals court upheld a lower court's ruling that prohibited California from making any further payments - including IOUs - to doctors, hospitals, hospices and nursing homes until it has a budget.
This means that the 4.2 million Californians on Medi-Cal, the state's health programme for the poor, could eventually be denied care. So could the tens of thousands of old and disabled people who have state-funded home help.
If no budget agreement is reached, the crunch is expected at the end of this month, when the small cash reserves held by hospices, nursing homes and other health centres are likely to run out. Some of California's larger hospitals are already making plans to take in patients turned out on to the streets. Still more ominously, reports are beginning to emerge of private doctors turning away Medi-Cal patients because they fear their bills will go unpaid.
The Governor, Pete Wilson, has never made any secret of the fact that he blames the poor for the state's financial problems. He argues that the number of welfare recipients is rising four times faster than the state's steadily growing population, which now stands at some 30 million. Welfare, he says, is the 'prime engine' powering the state's perennial overspending.
In an effort to bridge a dollars 11bn (pounds 5.7bn) deficit, he has drawn up a budget that is generally characterised as draconian. It includes cutting welfare grants by up to 25 per cent, eliminating many medical and dental services, and reducing local government funding. He has also proposed cutting dollars 2bn from education spending, even though California's classrooms are among the US's most underfunded and over-crowded. Teachers in Los Angeles, who have been told their wages will be cut, have threatened to strike when the new school term begins.
Recently, however, there have been signs that the political deadlock could be about to shift. On Friday, Mr Wilson presented a revised plan in which schools would have dollars 700m more, although only by borrowing from future funding. This was expected to go before the legislature late yesterday. There is increasing pressure to reach a compromise, both because of the Medi-Cal ruling and because some banks have been refusing to honour the state's IOUs.
The crisis has contributed to a steep plunge in Mr Wilson's popularity and has fuelled disillusionment with the political process.