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Obama's hard stand with California

If the federal government is going to prop up the state's finances, it's a good opportunity to get tough on reform.

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By Jeff Segal,

( -- The Golden State isn't glistering much these days. Voters in California will decide on six proposals today aimed at curbing its $42 billion deficit. Polls indicate that all will fail.

The state has also asked the federal government to backstop its borrowings. That gives the Obama administration useful leverage. As it did with ailing carmaker General Motors, the feds should require that California agrees to crucial changes before it gets support.

Even if the proposals all pass, California will still be in a bind. It needs to borrow some $13 billion this summer. But it has the worst bond rating of any state. That's why it needs the Treasury to guarantee its short-term municipal bond sales. Without such support, borrowing could be prohibitively expensive.

But the federal government shouldn't agree to prop up the state without a quid pro quo. Above all, it should demand changes to California's constitution to remove provisions that make sensible economic policies almost impossible to implement. One is the need to secure a two-thirds vote to pass a budget, which gives special interests a blocking position.

The federal government could also demand the repeal of California's proposition 13, which limits property taxes - admittedly not much help now, but potentially beneficial when the housing market recovers.

Of course, both would require voter approval - which is no sure thing given the state's contentious political scene. And changes to the constitution, in particular, could take well over a year. Since California needs to borrow money soon, it would have to assure the federal government that it is serious about reform.

The Obama administration took a hard stand with GM (GM, Fortune 500) and Chrysler. Its reputation for doing so could help in dealing with California. The ensuing debate might make the clash between the carmakers and their creditors look like minor squabbles. But for the good of state, the feds should seek to drive California's reform. To top of page

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