California must be dreaming: Agnes T. Crane

-- Agnes T. Crane is a Reuters columnist. The views expressed are her own --

By Agnes T. Crane

NEW YORK (Reuters) - Don't underestimate the power of California, and its ability to suck in a reluctant federal government to bail it out of a fiscal mess of its own making.

But the Obama administration and Congress should resist.

Not only is the federal government shouldering the already heavy burden of sorting out the auto and banking industries, the housing giants Fannie Mae and Freddie Mac and the hard-to-get-rid-of American International Group (AIG.N: Quote, Profile, Research), but such action would undermine the state's need to revamp what has become an ungovernable system built on gerrymandering, ill-conceived tax schemes like Proposition 13 and unrealistic restraints like needing a two-thirds majority to pass a budget.

Intervention in California would open another too-big-to-fail Pandora's box, but one that is much more difficult to navigate politically since the federal government would be dictating which state, and by extension which voters, are worth saving. California, though the most extreme case, isn't the only state suffering.

In fiscal year 2009, 38 states are experiencing revenue shortfalls, according to a joint survey by the National Governors Association and the National Association of State Budget Officers. Over three quarters of the states have already slashed their budgets by $31.6 billion, but that won't solve the more than $180 billion gap still projected between 2009 and 2011.

It would also further encourage complacency in the $2.7 trillion municipal bond market, where the assumption persists that no matter how disastrous a state's finances, investors need not worry about default.

That California has itself to blame as much as the slump in revenues should also make it a hard sell for a bailout.