cross posted at Fox & Hounds Daily.

If you haven't read this week's report by the non-partisan Legislative Analyst's Office, you must. There's plenty of bad news about the state being low on cash, but that we knew. Here's what knocked me over.

"Federal Assistance Could Come With “Strings Attached.” We believe it is appropriate for the Treasurer to explore the possibility of federal assistance—such as a federal loan guarantee—to address this summer and fall’s grim cash outlook. We caution the Legislature, however, against assuming such federal assistance will be available. By taking prompt actions to reduce the state’s cash flow borrowing need to under $10 billion for 2009–10, policymakers would enhance the ability of the Treasurer and Controller to secure private investment with or without a federal loan guarantee. Moreover, reducing the state’s cash flow borrowing will involve actions that improve the state’s medium– and long–term budgetary outlook. These actions would increase confidence in the bond markets, which are needed to continue providing funds for infrastructure projects that spur economic activity and long–term growth. Finally, and perhaps most importantly, we advise the Legislature and other state policymakers to be cautious about accepting any strings that might be attached to federal assistance. Strings attached to recent corporate bailouts—as well as federal loan guarantees provided to New York City during its fiscal crisis three decades ago—have included measures to remove financial and operational autonomy from executives. We recommend that the Legislature agree to no substantial diminishment in the role of California’s elected state leaders. In our opinion, the difficult decisions to balance the state’s budget now are preferable to Californians losing some control over the state’s finances and priorities to federal officials for years to come." (Italics are mine)

Let me clarify. The state may need to seek federal guarantees so it can borrow short-term cash to meet its obligations this summer and fall. But in return for this federal bailout, California may have to give up sovereignty, the LAO suggests. That is: elected officials might be asked to give up some of their control over the budget. This is real. As today's LA Times reports, the feds are already threatening to take back stimulus money because the state cut salaries for home health care workers.

My reaction: this sort of federal intervention would be an embarassment for the state, but I wouldn't mind if the feds pushed to limit the power of elected leaders as part of what would be, no matter how the LAO parses it, a federal bailout. However, the feds shouldn't stop there. Any federal intervention also should require new limits on a different set of lawmakers--the people of California. Through ballot initiatives and measures, voters have been significant contributors to the state's budget deficits and cash crunch. Perhaps a freeze on new initiatives until the state meets certain fiscal benchmarks? I'd also like to see the feds do some pushing against our two-thirds budget and tax requirement, which is a big part of the reason why the state can't balance its books.