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05-28-2009, 03:14 PM
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State's Rights? Taxpayer's Rights?
The State of California is in a heap of financial trouble. Following the lead of the members of the U.S. Congress, the state went on a spending binge over the last 4-5 years. Now the decline in the state's economy has resulted in a drop in their revenues amounting to more than 20% of the state budget.
In last week's election, California residents soundly rejected several of the ideas set forth by their governor to try to balance the budget. Their problem remains.
But it gets worse. It takes 2/3 majority plus 1 in the California legislature to even pass a state budget. Their state legislature, with all their regional and special interests, has had absolutely no success in even coming close to establishing a budget that would both be balanced and also be passable.
Now Governor Schwarzenegger is proposing that the U.S. government guarantee the repayment of the general obligation bonds that California will have to issue in order to pay it's expenses. It's been projected that within months, California will be unable to pay it's bills or service it's debt. Others have opined that if the U.S. government were to agree to guaranty the debt of California, that the AAA risk-rating of the U.S. would almost certainly be jeapordized.
All that seems to raise a couple of questions...- Should the U.S. government provide financial assistance, such as guaranteeing bond debt, for California or any other state?
- If the federal government did agree to backstop a state such as California with taxpayer's money from the other states, should the federal government become involved in the governance of the state? As an example, if the federal government were to guaranty California bonds, should it assume a role of establishing and approving a state budget that would assure that the fed guaranty would not be called upon? Should the federal government establish what the state should spend money on? Should the federal government become involved on the revenue side by dictating additional state taxes which might be necessary to balance the state budget. Basically, should the federal government supercede the California legislature because of their proven incompetence in managing the state's financial affairs.
Just a couple of questions to be considered.
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My answers:
Question #1 - NO
Question #2 - Not applicable
I provide these answers with the full understanding that the economy of the State of California is the equivalent of the seventh largest country in the world. And if California were to default on it's debt obligations, or be unable to issue additional debt, it would be the equivalent of a bankruptcy that would make that of GM and Chrysler pale by comparison. Financial failure for an entity as large as California would have disastrous effects on the economy of the U.S., if not the world. There is no Chapter 11 for state governments.
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