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Comment by nlavezzo | Hacker News Reader

Everyone who buys California state bonds (which are income tax exempt) is loaning the money. The interest rate California has had to pay to entice people to buy these increasingly riskier bonds, has increased accordingly as the state's financial condition has deteriorated. It is a risky deal, and buying CA state bonds to hold until maturity is basically a bet that the state will get bailed out by the federal government.

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Yeah I knew it would be bonds, just seemed like a risky proposition. I guess any responsible economic action here isn't going to be popular so it's not going to happen?

Hypothetically what would happen if the state decided to reform these pensions, slashing them right back to something they could realistically afford?

I think responsible economic action is very popular with the population of California in general. Unfortunately, the general population of a given state doesn't get involved in local elections (what's the name of your local state delegate?) unless they work for the government they're voting in. Therefore even though the population in general might be howling for reform, the state delegates that have to push it through have no incentive to, since they know the great majority of people that actually know who they are and are going to vote in the next election, are against reform.

The fundamental problem is that a large amount of possible government action is hampered by a constitutional rule that says that 60% of the house has to agree on any budget. Structurally neither party has the power to get to 60% of the state legislature, voting for taxes is political suicide for Republicans, and voting to cut benefits is political suicide for Democrats. So we have permanent deadlock with no attempted solutions being politically viable.

With your example, if California tried that before declaring bankruptcy, there would be court challenges that California would lose. Even if contracts going forward were amended, that wouldn't help the structural problems from what has already happened.

Therefore California requires either bankruptcy or extraordinary assistance. And the Obama administration has indicated that no extraordinary assistance will be forthcoming.

It is worth noting here that California is one of the few states that pays more into the federal government than we get out, and the amount extra we have paid in over the years is more than enough to rescue the state government.

s/60% of the house/66% of the house/

From: http://www.leginfo.ca.gov/.const/.article_4

Const., Art. IV, Sec. 12 actually stipulates

" (d) No bill except the budget bill may contain more than one item of appropriation, and that for one certain, expressed purpose. Appropriations from the General Fund of the State, except appropriations for the public schools, are void unless passed in each house by rollcall vote entered in the journal, two-thirds of the membership concurring."

Another problem there is that there is no mechanism for a State to declare bankruptcy. There were several discussions about this on Megan McArdle's blog http://meganmcardle.theatlantic.com (I think from last fall through early this summer).

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