Is California Too Big To Fail?
California 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.