California was often said to be on a par with a Third World country during blackouts caused by the energy crisis. Although I never saw people carrying buckets of water to their homes or soldiers patrolling street corners, the indisposed grid led to personal hardship, gridlock, and civil unrest?not unlike life in developing countries. One of the other things California shares with Third World countries is a debt so big that servicing it is beginning to mount up to what is referred to in developing countries as ?structural adjustments.? This a term well known in much of the rest of the world. In countries such as Venezuela, for instance, loans made by the World Bank and International Monetary Fund require severe social consequences if the loans can?t be repaid as planned. Rationing essential services, such as electricity, is one outcome. Governmental functions are cut to the bone and beyond. Often chaos results and a coup d? ?tat?or in California speak, ?extreme recall??results. No state in the US has ever filed for bankruptcy protection before. Many think that from the way the law is written, a state cannot file for bankruptcy, only a subdivision of a state can. Orange County in 1994 is the closest example. It had $1.64 billion at stake. California?s budget crisis is many times greater, with an $8 billion deficit projected for the next fiscal year. While some in government go apoplectic when I bring up the subject of state bankruptcy, Mark Baldassare in his book on the Orange County fiasco, "When Government Fails," said it boiled down to three factors. These are political fragmentation of the local governments; fiscal conservatism underlying voters? feelings about their tax dollars; and financial austerity in state government to meet rising state expenditures. A state bankruptcy would have to be filed under Chapter 9. That little-used part of federal law allows for citizens to participate in the debate about debt restructuring. The U.S. Supreme Court says that municipalities do not have to, but may, raise taxes to pay off the debts. Chapter 9 protects the rights of municipal debtors to continue providing services without giving creditors the ability to cut them back or liquidate assets because that would violate the Tenth Amendment and state sovereignty?unlike the structural adjustments levied on international debt. In other words, the building at 505 Van Ness in San Francisco, Redwood State Park, or the California Aqueduct would not be on the auction block. Seeking Chapter 9 protection jibes with Californians? independent streak. According to the US Eastern District Court of Washington, Chapter 9 restrictions on federal interference are necessary ?to avoid the possibility that the court might substitute its control over the political or governmental affairs or property of the debtor for that of the state and elected officials of the municipality.? In other words, a state bankruptcy would be unlike Pacific Gas & Electric?s current bankruptcy proceedings. Creditors could not propose their own plans of reorganization. (That would lead to a curious standoff?the biggest utility in the nation unable to enforce a deal with the biggest state in the nation. I?d love to be at that hearing. I can?t even begin to imagine the lawyers? fees.) And a federal court would have little to say about any fees or other costs racked up during a bankruptcy. According to the Eastern District court, payments on general obligation bonds can be suspended. However, special revenue bonds, under which the nearly $12 billion in bonds used to pay back the state for electricity it bought during the energy crisis would likely be categorized, would continue to be paid off. How much worse could it get? California already has the lowest credit ratings of any state, and it takes a lot to fetch investors? enthusiasm to put money here. For instance, in discussions leading up to issuance of the $12 billion in state energy procurement bonds last year, Wall Street investors required premium mitigation in the form of high interest rates before deigning to work up the enthusiasm of milky tea to buy up the lot. I imagine the <i>New Yorker<\/i> magazine?s mascot Eustace Tilley with his nose sniffing the metropolitan air and his hand out for Western dollars. Will it happen? There have been a lot of bankruptcy ?firsts? in the last two years?Enron and PG&E most spectacularly. With an $8 billion problem following the state around, there should at least be a serious public discussion of the possibility. Would Chapter 9 hurt the state?s economy as a whole? Could it hurt the energy industry any worse? ?The question that needs to be posed is what it would do to the state?s ability to get access to borrowing in the future,? said Tim Gage, former director of the state Department of Finance. However, Gage, now a California Independent System Operator board member, doesn?t think that bankruptcy is possible. The potential benefits of a bankruptcy filing include exempting the state from draconian structural adjustments under Chapter 9; protecting energy suppliers, both public and private; and potentially protecting consumers from an inordinate hit where ratepayers take on debt that taxpayers as a whole do not. There is also the added benefit of freeing up regulators and other state agencies to keep California from being branded a banana republic.