Bailing out states is not new.  In 1790, Alexander Hamilton bailed out the New England states following the Revolutionary War by having the federal government assume the debt of the states.  New England states had born a disproportionate share of the costs of the war, and Hamilton cleverly bought off the southern states by giving them the capital.  The plan worked so well in restoring our young country's credit that fiscal policy experts still study its lessons.  Wikipedia has an excellent article on it.

No state has gone bankrupt, but New York City famously became insolvent when it couldn't roll over its debt in 1975, although technically it wasn't a bankruptcy.  Up until then, City leaders kept increasing spending until creditors wouldn't lend to them anymore.  In 1976 and 1978, Congress revamped Chapter IX of the U.S. Bankruptcy Act of 1898 to provide for an orderly renegotiation of New York City's debt.  The GAO report on this makes sobering and familiar reading.

Like New York City, except on a far larger scale, California increased spending and borrowed a lot when times were good and got caught by plummeting revenues when the financial crisis took hold last year.  Governor Arnold Schwarzenegger pushed through a $40 b. two-year deficit reduction package in February, which claimed to close the fiscal 2010 deficit to $6 b.  Last week he urged California voters to pass several "propositions" to balance the budget in the face of a $21 b. deficit, the release of 40,000 prisoners, and layoffs of 51,000 teachers.   California voters don't scare easily. On May 19, they rejected every proposition except Proposition 1F, which denies pay raises for state legislators when the state budget isn't balanced. George Will's op-ed reviews that rejection and makes a strong case against granting a federal bailout.

Next stop Washington!

Not quite yet. The Los Angeles Times reported last week that President Obama's top political advisor, David Axelrod, was quite reticent about bailing out California as was Treasury Secretary Tim Geithner.  Interestingly, the California congressional delegation is split as are many back in California.

I would point out that last February's stimulus bill provided the states with $259 b. according to the Congressional Budget Office.  A state-by-state breakout can be found at the Senate Democratic Policy Committee website.  Although economic stimulus was the main purpose of these funds, they offset other state expenditures that, for the most part, can be used for deficit reduction.  The $23.3 b. that California will receive is still not enough.

I would also point out that nearly half of state spending is mandated by the federal government, particularly for Medicaid and for education.  I didn't find any reports on this after several searches, but there must be some.  Please forward any links you find.

To conclude, I thought The Washington Post editorial of last Sunday put it well:

"Bailing out the banks was defensible because of the critical and central role they play in the economy. Bailing out the auto companies may have made sense in order to save jobs -- though now that the government is heading for long-term ownership, we are beginning to doubt the worth of that policy. Bailing out the states would be an even more perilous road to start down."