Why Obama Has to Bail Out California, But Won't

Each year about this time, the nation turns its weary eyes to Sacramento, where the perennial late-June budget crisis has the Golden State on the verge of bankruptcy.

This year, the numbers are gaudier than ever. The state must close a $24 billion gap between revenues and expenditures by July 1 or run short on operating cash. The gap to be closed is bigger than most states' budgets in their entirety. And while last-minute maneuvering has averted disaster in the past, this year's negotiations are proving fruitless.

Gov. Arnold Schwarzenegger has proposed selling the L.A. Memorial Coliseum and San Quentin prison, releasing thousands of prison inmates, closing more than 200 state parks, wiping out welfare for a half-million families and terminating health care coverage for nearly a million children in low-income households. But even all that is not enough when tens of billions of dollars must be found.

There's only one place where people fling such numbers about routinely without irony or awe. And that one place is Washington, D.C. That's why lots of Californians, cool as ever, shrug their well-tanned shoulders and say the feds will bail them out. Just like GM and AIG. Just like the banks.

Well, yes and no.

Yes, California is important to the health of the broader economy and body politic. Yes, California contributes 14 percent of the total national economy. If it were a separate country, its economy would be among the eight largest in the world.

And yes, the bankruptcy of its state government may well throw thousands of state and local government employees out of work, prompting more layoffs in the private sector. Staggered by such dislocation, California could slow or even abort the nation's nascent recovery from recession.

If that's not enough pressure on the president, consider the politics. All by itself, California supplies one-fifth of the Electoral College votes a candidate needs to become president, and in 2008 it cast its vote overwhelmingly for Barack Obama. Any strategy for his re-election begins here.

Moreover, the speaker of the House and the chairmen of a half-dozen major congressional committees all hail from California, which also happens to be by far the richest trove of campaign funds for all candidates for federal office.

And yet, and yet ... no.

No, the federal government is not about to bail out the state government of California. The cavalry is not riding to the rescue.

President Obama has expressed alarm, of course, but if you listen closely to what he says, you'll hear the federal Treasury door slamming shut. The White House has made it clear: Budget bailouts for individual state governments are not happening.

That's a source of frustration and anger for Californians, inclined as they are to believe that Washington is as much to blame for their predicament as Sacramento. They see little to admire in the budget shenanigans of other states and still less to emulate in the budgetary practices of Capitol Hill.

From the coastal perspective, putting California in the penalty box seems a pious show of parsimony and the height of Washington hypocrisy. Who can argue that California has been more profligate than, say, New York or Illinois? Or that its decisions have been more reckless than those of GM?

The difference, of course, is fairly simple. When the Obama administration decided to bail out GM, it did not have 49 other car companies standing in line behind it. A bailout for California would establish a profound precedent. If Washington decided to underwrite Sacramento this year, it would be on the hook to do it every year. And how could the White House or Congress say no to any other state that couldn't bring itself to balance its own books?

Wait now, the Californians say, it's not that simple. It's not that they don't want to be provident. The economy is down and unemployment is up, higher in California than anywhere but Michigan. State income tax revenue, the lifeblood of the budget, has fallen off by more than 30 percent. How can you blame California for its own suffering?

It's a decent argument. But four other states have experienced income tax declines equally steep or steeper. And none of them is a basket case as bad as California. That's because they all have a political mechanism for dealing with a budget crisis, even one so severe as this.

California, sadly, does not. That's why its current crisis is not really economic; it's governmental. California's political model has failed at the basic tasks of negotiation and compromise by which public sector budgets are built.

A century ago, progressive Californians such as Gov. Hiram Johnson installed populist inventions such as the initiative and referendum process. They did it to wrest control of the Legislature from the Southern Pacific Railroad and other monopolies.
In recent decades, these populist mechanisms have become increasingly popular as means to subvert the normal (and often gridlocked) legislative process. They have been used to commit the state to big spending programs for popular items like early education, but their main effect has been to limit revenue options severely.

Beginning with the watershed Proposition 13 in 1978, the state has hamstrung itself by walling off property values of longtime owners from tax inflation. Politically, it's hugely popular. In terms of fairness, economics and government policy, it's disastrous.

If that were not enough, the state Constitution also requires the budget to pass by two-thirds vote, the same vote required to raise taxes. Needless to say, doing either one has become impossible for all practical purposes.

Some elements of the state power structure have tried this year to regain control over the budget with new ballot measures designed to break the stalemate. But the April voting drew only a trickle of turnout, and the result was a lopsided refusal to pay any more or do with any less.

At this point, all sides seem resolved to remain at impasse and let someone else blink first.

After all, you can't just let California go.

Or can you?

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