California and the All-Important B-Word

California Gov. Arnold Schwarzenegger made one thing very clear earlier this week. From the Los Angeles Times: But Schwarzenegger acknowledged the federal government can only ...
by | May 22, 2009

California Gov. Arnold Schwarzenegger made one thing very clear earlier this week. From the Los Angeles Times:

But Schwarzenegger acknowledged the federal government can only do so much to help California ease its financial problems. "The rest of it we have to do ourselves in California," he said. "We've made it very clear that we're not asking for a bailout. We're not asking for any money we don't deserve under the economic stimulus package." 

No federal bailouts, got it.

The funny thing is, though, the L.A. Times also has a story headlined, "Federal Officials Unsure About California Bailout." George Will wrote a column headlined, "The Coming California Bailout." CBS News reports the following:

California, the state that gave us wheatgrass, the microprocessor and the summer of love, is about to provide us with yet another first: a bailout of a failing state government.

So is the state seeking a bailout or not?

This is all a question of semantics. But, it's a really important question of semantics.

What California wants are federal loan guarantees. The state (like most states) routinely engages in short-term borrowing because tax collections are concentrated in certain months of the year. Now, due to the state's weakened financial position, the interest rates on the loans could be much higher than normal, costing the state money it obviously can't afford.

Is a loan guarantee a bailout? That's open to debate. The federal government wouldn't actually be sending any money to California, unless the state defaulted on its loans. On the other hand, the feds would be providing a substantial financial benefit to one state, and one state only, because of its fiscal troubles.

Here's what I am pretty sure about: If everyone starts calling these loan guarantees a bailout, they aren't going to happen. That's partially because bailouts aren't very popular. It's also because the case for bailouts for state governments is weaker than for major companies.

Though California is too big to fail, it's also different from A.I.G. or G.M. in a key way. California could reduce its budget problems in a flash simply by reducing spending or by raising taxes or by raising revenue in other ways (such as leasing the state lottery or selling state property).

Of course, because of politics, there's nothing simple about doing any of those things. Californians just rejected these very solutions at the polls. Nonetheless, California -- or any state -- has tools to fight financial disaster that private companies lack.

Who is going to support a bailout for California when the state hasn't first tried making some hard choices to solve its fiscal problems? Of course, if the state is simply interested in an innocent "loan guarantee," that's another matter entirely.

Josh Goodman
Josh Goodman  |  Former Staff Writer
mailbox@governing.com  | 

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