Incoming California Governor Jerry Brown has gotten a look at the state budget and concluded that "We've been living in fantasy land. It is much worse than I thought. I'm shocked."
It got me thinking about what would happen if California went bankrupt.
In the absence of a statute, presumably the federal government would conduct some sort of bailout combined with a restructuring. If so, however, who would run the state during the proceeding?
In a commercial bankruptcy, there are two possible approaches. First, there is the bankruptcy trustee. S/he is appointed to liquidate the business and may be empowered to operate the business for a limited period of time. Second, there is the debtor in possession. In the latter case, the debtor remains in charge of the business while the Chapter 11 bankruptcy proceeding goes forward. For reasons that should be obvious, but which I'll come to in a minute, this would be my least preferred analogy for how to run a state bankruptcy.
In a municipal bankruptcy under Chapter 9 of the Bankruptcy Code, neither the federal government nor the bankruptcy court can order the appointment of a trustee to take over running the municipality. A state, however, can insist upon the appointment of a receiver or trustee as a condition of authorizing the municipality to file for bankruptcy. Indeed, when Orange County went belly up, California consented to the filing of a Chapter 9 proceeding only on condition that a trustee be appointed with all the powers of the Board of Supervisors if the county failed to meet certain conditions.
So suppose California goes belly up. Brown goes to Washington and they decide to bail us out. But the feds look at our state and conclude: (1) Nobody trusts Governor Moonbeam. (2) The legislature is completely dysfunctional and cannot be trusted. (3) The electorate caused much of the mess by passing way too many idiotic ballot propositions that raised spending and cut taxes. Leaving the debtor in possession would be a disaster. We can't trust the debtor to do the right things. So the feds say: We want to appoint a trustee to run the state until it gets back on its feet.
All of which has been a lead up to this question: Would doing so violate the Guarantee Clause of the Constitution, which says that "The United States shall guarantee to every State in this Union a Republican Form of Government."
If not, I say let's do it. A nice, temporary, benevolent fiscal dictatorship might cut the Gordian know that is our state's finances.
Googling the question didn't turn up much, except for an interesting post by Gerard Magliocca, who didn't have an answer but posted some almost as interesting questions:
There are many states right now (most notably California) that are under fiscal stress. Some people, like Sandy Levinson, argue that this is because those states have dysfunctional constitutions. This leads me to wonder if a state could be deemed “not republican” under the Guarantee Clause if it goes bankrupt. Suppose that California came to Congress seeking a loan. If Congress said, “OK, but only if you amend your constitution to do X, Y, and Z,” that could pass muster under the Spending Clause if the reform proposals were sufficiently related to fiscal issues. But suppose California just defaulted on its debt. Would Congress then be justified in putting the state into receivership for some period of time? An invocation of the Guarantee Clause would not be justiciable, of course, but that doesn’t answer the constitutional question. What do you think? Does the Tenth Amendment protect a state’s right to default?
Update: Gerard's phrasing got me thinking about another analogy: the receiver in equity:
The purpose for which a receiver in equity is appointed, is usually quite different from the purpose of a receiver or trustee in bankruptcy. The latter aims first to take possession of all the property of the insolvent individual or concern; next to dispose of the property as quickly as is practicable; and third, to distribute the cash that has been realized. A receiver in equity, on the other hand, has for his function to keep the business running as smoothly and with as little loss as possible. He may make some changes in methods of administration and may properly retrench whenever he can do so without impairing the efficiency of the property, but in general he carries on the business in about the same manner in which any business is carried on. He aims not to turn the assets into cash, but to keep working as profitably as possible.
Would appointing a receiver for California violate the Guarantee Clause? If so, it's a great pity. It sounds like exactly what we need.
