Is California Too Big To Fail?

120px-flag_of_californiasvgCalifornia is in the midst of another budget meltdown.  Many say that the problem is a structural one and can be corrected only by a constitutional overhaul of the supermajority rule for passing budgets and through limitations on the use of ballot propositions to dictate taxes and spending.  There is a movement to call a constitutional convention in the State, but as I don’t live there, I’m not really in a position to comment one way or the other.

The more pressing question is whether the federal government will give California a bailout.  The Treasury is rejecting the idea right now, but that’s always its initial position on federal aid.  Unlike GM, AIG, Freddie Mac, Fannie Mae, or Citigroup, CA cannot give the federal government equity in exchange for loans.  (I guess they could transfer title to state assets — I’m sure the feds would love more parks or San Quentin.).  How would the Treasury guarantee repayment then?

Note that it in the case of the private (or quasi-public) firms, the Treasury insisted on certain structural reforms as a form of security (Chapter 11 reorganization, replacing management, etc.). Could the same be done for a state?  The case law on the Spending Clause would suggest that the answer is yes so long as there is a reasonable relationship between the condition imposed and the loan.  These authorities, however, are limited to laws of general applicability within a state (e.g., change your drinking age or speed limit in exchange for aid) rather than the governing structure of the state (e.g., move your state capital, change your budget process).  It seems to me that latter raises a significant Tenth Amendment problem.  The partial nationalization of firms is one thing.  Partial nationalization of states is another.

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6 Responses

  1. Syd Henderson says:

    Well, they should just do what they did the last time: Recall the governor. That worked, didn’t it?

  2. Jake says:

    Pray tell, how could there be a Tenth Amendment problem?

    As written, the Tenth Amendment states:

    “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”

    For there to be a constitutional issue of the sort Magliocca suggests, the Tenth Amendment would have to read along the following lines:

    “A State, if populated by persons dumb enough to believe the role of government is to rain cake and parades upon gullible voters, may demand whatever conditions it pleases, before accepting aid from the United States that might rescue the State’s electorate from their folly.”

  3. dfb says:

    I do not see it as part nationalization of the state for the Federal government to insist on budget or revenue system reforms before providing money to California. Even if the Federal government required California to scrap Prop. 13, the 1978 referendum that keeps property taxes low and requires a 2/3 majority to raise new taxes, it is still up to California to pass the laws that actually make those changes.

    That said, the Federal government needs to insist on changes to the California Constitution before providing loans or bailout money, as it does when providing money to foreign jurisdictions. The California budget process is a shell game. It has been for 20+ years where legislators move money around from one account to another, change tax collection dates so they fall in an earlier fiscal year, “borrow” money destined for local governments to comply with state laws, and so on. Voters have not made it easy either by piling on one referendum after another that directs money by constitutional mandate to one specific purpose or another. There are no more accounting tricks available so decisions made many years ago by legislators and voters are coming back to haunt the state. With that in mind, requiring changes that limit or prevent future shell games is likely to be considered reasonably related to the feds giving money.

    btw: I live in California

  4. I\’m just at a loss as to why you think the federal government would *care* if there\’s a tenth amendment problem, absent some reason to believe the courts would intervene. The tenth amendment is one of those dead letter amendments the judiciary have decided they won\’t enforce, after all.

    Heck, they don\’t even seem to have cared much about the law in their nationalization of companies, and there\’s actually some prospect the courts might take exception to handing ownership of a major company over to political supporters.

  5. I’m also at a loss as to why the site inserted those back slashes into my comment. It doesn’t like abbreviations?

  6. A.J. Sutter says:

    Could the Feds require that California take and follow advice from the IMF? That always seems to help.