Prof. Bainbridge offers an interesting look at the possibilities of what would happen if a US State, in this case California, goes bankrupt. He raises the question if the federal government could offer some sort of 'bailout' and then asks what would that look like?
Before jumping all the way to bankruptcy views of either the personal or commercial kind, lets take a look at the US Constitution and what it has to say about such matters:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;
Section 8 is always a good place to start! Here, however, the general Welfare clause is due to all the States, equally, thus the federal government cannot be seen as 'on the hook' to bail out California. California did not incur its debts in the name of We the People but for its own population, and, from that, it is primary in its responsibility to solve its debt problems, not the federal government.
This is in stark contrast to the Revolutionary War debt owed to France, which was then apportioned out to the States to pay (which caused the impoverishment of farmers in the North and led to the rising of rebellion). In that case it was a debt take on by We the People and the burden was to be shared. Here that is not the case.
The next clauses in Section 8 of interest are the following:
Highlighting of sections is mine, throughout.
Here there is the interesting piece on the 'uniform Laws on the subject of Bankruptcy'. This would, apparently, be the clause to look for to create legislation. With that said the action where it is to be applied to is 'throughout the United States'. Thus the laws created must be throughout the States so that there is a recognized way for those within the States to have a uniform process applied to them. If it was then the language would read something like 'Bankruptcies to and throughout the United States'. This is far too much power to give to a federal government if you are a collection of sovereign States looking to form a joint venture that applies to all of the sovereigns.
With that said the question of making bankruptcy laws for the States, as States, is questionable as they are the sovereign actors that sign on to, and lend power to, the federal government. As sovereign actors they have the authority to dispute laws which apply to them as sovereigns and an attempt by the federal government to dictate bankruptcy laws to the States is not something that is outlined by this clause. This is the first stumbling block: as the States are the ones who bring the Constitution into force for their people by agreement, then they are the ones left holding the bag for their people for their interior administration.
There are two venues for how to approach this.
1) Each State creates its own laws for what happens when it goes bankrupt. This is problematical as it is unlikely to be seen as trustworthy given that the very same government is the one spending the State into bankruptcy.
2) A Convention of the States is held to create a system applicable to all of the States. This could be through the federal government or by a common assent of 3/4 of the States to agree to have a newly devised system applied to them.
Due to the strict limitation of federal power by Amendments IX and X, the States are left holding the bag for their own problems in the realm of debt.
Those are the positive powers of Congress, as seen in Section 8, and while great for normal affairs of a Nation as a whole, they do not address the Nation as parts as those parts are independent actors within the Union they agree to.
Now onto the the States.
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.
No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.
No State shall, without the Consent of Congress, lay any Duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.
Generally I like to think of Section 10 as the Ten Commandments for the States as they are of the 'thou shall not' form. Still within that form there are positive articles.
The part on coining money that I highlighted I tried to deal with in a prior post. Here the proscriptions are fierce, and yet at one time the United States had money from different States under the Constitution. The difference between now and then is that our current money is scrip that has no backing, while what is allowed is gold and silver Coin as tender for payment. The United States, itself, stayed on a gold standard before the federal government started to just print money and President Nixon took us off the gold standard. Paper money can and did represent gold tender with so many dollars per ounce, and this was also true of the States at one time.
Thus, one possibility is the one I outlined in my prior post: have the gold bullion held by the US Treasury divvied up to the States by population with the States to have a gold backed debt scrip set by the State (say at 1200 scrip per ounce of gold, or 2 grams of gold per single scrip). This could be circulated as Tender in Payment of Debts with a cashout period of, say, 5 years to allow the economy to stabilize inside California (or any other State for that matter).
This would have the benefit of being gold backed, and thus having real value, and extremely limited, which would force California to cap off its debt spending if creditors no longer accepted greenbacks. Part of sliding into bankruptcy is having your credit drop to nothing, and you are forced to deal in real money that has some backing to it. As each person in California would have a vested interest in keeping their gold backed scrip inside the State, this would create a decision point on what to do about spending. A penniless State is one that beggars the imagination, and yet the citizens from it would be free to leave for more fiscally sound States while leaving the bankrupt State behind. Or the citizenry could demand that the State stop spending the very last part of its wealth, for that is what the gold represents, and downsize internally. This is a variation of the 'in State' way to solve the bankruptcy via the allowance of being able to pay off debt with only gold or silver.
When a State loses its creditworthiness it finds borrowing impossible. Thus a debt scrip would allow it to re-organize internally while the government drastically downsized to fit its revenue from taxation and not squander the last of its wealth in gold and silver. When others stop accepting money on credit due to the amount of debt financing an individual has to do, they are unable to borrow and must pay 'cash on the barrel'. Thus it is for a State and once they run out of greenbacks, which would be very quickly these days, they are no longer going to get monetary 'floats' on even short term debt: basic necessities become something you pay for up front, not even on account. Since such purchasing happens between a State and private enterprises, there is no conflict between the States as this is a business matter, not an internal State-to-State matter: businesses have the right to refuse custom based on inability to pay and being a sovereign does not change that relationship. This may seem in conflict with Article IV:
Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.
But that is for laws and proceedings, not for actual credit or debt obligations. Thus all of Articles I, II and III are done and now into Article IV a bit further.
Here is the meat of what Prof. Bainbridge and some commentators are getting at:
New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned as well as of the Congress.
The Congress shall have Power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States; and nothing in this Constitution shall be so construed as to Prejudice any Claims of the United States, or of any particular State.
The United States shall guarantee to every State in this Union a Republican Form of Government, and shall protect each of them against Invasion; and on Application of the Legislature, or of the Executive (when the Legislature cannot be convened), against domestic Violence.
Section 3 is pretty clear: you must be able to guide your own actions as a State before you can be admitted into the United States. Thusly California is a sovereign with voluntary entry into the Union. To become a Territory would require the consent of the governed and this is, essentially, a discorporation of a sovereign State: California, as a sovereign entity, would be at an end. This is not something that can be imposed by any law as it is the people of the United States, in each State, who guide their own destiny. While putting forth that having California as a Territory might be more pleasing and be something that the United States is better able to deal with, the United States would then be on the hook for all the debt of the prior State. To do that would also require an agreement, by Congress, to accept the Territory of California into the protection of the United States as once a State discorporates there is no 'reversion' to the United States as it was free and independent territory before it joined the United States.
While the United States government would, presumably, claim possession of California, it would be with the understanding of it as a 'failed State' with debt obligation. That would be true of Mexico, China, Russia or any other Nation that wanted to do so: those debts do not go away and a larger sovereign entity assuming possession of California is stuck with its debt.
The only way for California to rid itself of debt, and this is in the extreme, would be to totally disband and repudiate its current government and hold an internal convention to create a new one only after the old one had defaulted on all debts. This could, of course, be done within the framework of the US as it stands: the people are free to make any interior government for their State so long as it upholds the commonality of the Constitution. With that said, California would have trouble getting any credit, any loans, indeed anything, on an other than 'cash only' basis if it did this. Those that go into default have a very, very, very hard time getting their creditworthiness back, and such a default would reflect badly upon the rest of the States through no fault of their own... which is why States would seek to have their creditworthiness rated separately from that of the Union and other States. California, meanwhile, would have a State with no contracts, no labor unions, nothing left from its previous incarnation and start from scratch with a new constitution, new laws and a new representation system. There would be no 'debt spending' as no one will give California any credit and the State may, in fact, see itself wanting a debt scrip just to get some working overhead as a new entity.
The prospects of a new government, after the old one defaults and disbands, is perilous inside or outside the Union: those who would seek to control the new State constitution would try to make it a 'modern' over-burdened affair that, unfortunately, would have no credit to run on. No matter what would be written into the thing, without any cash to institute any grandiose wealth redistribution schemes, the government would be severely limited in what it could do. And any attempts to 'soak the rich' even more would cause further emigration from California of anyone willing to work for a living.
Basically California needs to learn the basics of doing for oneself and getting out of the idea of people being entitled to anything more than Life, Liberty and the Pursuit of Happiness... and that last is a risky business as they have found out after catching Happiness: they are now succumbing to it. They have forgotten the Life is in the Pursuit of Happiness, using one's Liberty. The moment you think you have gotten it you soon find yourself without Liberty and then, very quickly, without a Life worth living.