First of all: ain’t going to happen. The state needs to spend $6.6 billion on bond debt, and has more than $50 million available. No default looming. I’m with Robert Cruickshank at Calitics: The law shouldn’t give bondholders first claim on the state’s money. But it does.
That said, some of the people who commented on my last post on the subject seem almost to be drooling at the prospect of a state or municipal bankruptcy; a judge, they argue, could force big reductions in employee pensions.
But there’s another twist on this that my colleague Johnny Angel Wendell just passed along to me:
In a normal bankruptcy, a judge looks not just at debts and obligations but at assets. A bankrupt corporation has to turn over all it has, including accounts receivable; hiding money isn’t legal. So suppose a bankruptcy judge looked at California and said: This is a rich state with lots of assets, and the only reason it can’t collect on those assets and make good on its debts — the number one responsibility of a bankruptcy judge — is that it’s hamstrung by some ridiculous laws. Bankruptcy judges have sweeping authority to restructure corporations; perhaps by the same standard, a judge could restructure not only California’s accounts payable and obligations but its ability to bring in money.
Imagine a court saying: Prop. 13 interferes with California’s ability to pay its debts. The two-thirds requirement for tax hikes interferes with California’s ability to pay its debts. Sorry, those laws are gone.
A federal judge has already mandated that California spend billions on better prison health care; why not mandate that the state raise taxes to cover its costs?
So all you fiscal conservatives who are looking only at the debts and liabilities side of the balance sheet, think about what you’re asking for. Because there’s an asset side, too — and California’s is pretty big.