MICHELE NORRIS, host:

And for more now on the budget problems in California, we turn to Joe Matthews. He's a former reporter for the Los Angeles Times. He's now a senior fellow with the New America Foundation. That's a nonpartisan public policy institute. Mr. Matthews, welcome to the program.

Mr. JOE MATTHEWS (Senior Fellow, New America Foundation): Great to be with you.

NORRIS: Now, it's hard to find a state right now that's not swimming in red ink, yet why is California in particularly bad shape?

Mr. MATTHEWS: In a nutshell, California has institutionalized in its constitution the worst and most irresponsible impulses of both liberal and conservative governance - low taxes and sort of autopilot spending. And we have a very inflexible initiative process of a constitution that it's easy to add things to, but hard to take things away from.

And the result is we've sort of institutionalized a structural budget deficit that existed before the economic collapse. The economic collapse has just made it much worse.

NORRIS: And the initiative that limits property taxes probably compounds this problem.

Mr. MATTHEWS: It's a part of the problem, but while it's often described as, you know, a huge part of the problem, it's not - it's just one of many similar measures that have helped create this larger problem.

NORRIS: Now, California is one of several states that are trying to make the case for a federal bailout right now. Top officials in Sacramento and some of the mayors have been pressing the White House to save the state, saying California is too big to fail. Now, that's an argument that had mixed results for the auto industry - what about the Golden State?

Mr. MATTHEWS: I think it's an argument that inevitably is going to win. You know, when the White House says, well, we're not going to do this now, I think there's wiggle room in that - we have no plans to do this. Eventually, when the state starts to run out of cash in late July, we may be able to forestall that for some period of time, but eventually we're going to need help.

I don't think it's actually quite right to call that a bailout. Essentially all we need is essentially a letter of credit from the federal government guaranteeing our loans.

But I think there's an opportunity in federal intervention and federal assistance for the state. We are incapable, I think as a state, of getting the two-thirds in our legislature that's required for changes in the budget or for tax increases. So, ultimately, we won't be able to solve this problem.

The advantage of federal assistance is that there would strings attached. And I think those strings would involve some sort of budget plan for California -forcing us to adopt one - to have the cash to - using the leverage of this cash shortage to force us to adopt a real budget plan that we stick to with penalties. And I think it's actually an opportunity, and given our inability to govern ourselves, I think it's sort of inevitable that the Feds will have to step in.

NORRIS: After that point, though, this notion that California might be too big to fail, the people making that argument, do they have a point? Are the budget problems in California so large? Is the economy so large there that it could tank the entire national economy?

Mr. MATHEWS: I mean, the state government, all the budget is only about $130 billion annually. We have a GDP of three trillion. I don't think it's the economy that's a threat. The threat that California poses and the state government poses is to other governments in the country. Other states and I think, particularly, other local governments, cities and counties that are in a bit of trouble because of the economic climate.

If we were to - if there were to be some sort of meltdown or, you know, goodness knows, default, which I think is almost impossible, but if things get very bad, we could make it harder for other cities and counties to borrow all over the country and thus make, you know, things very bad all across the country. It could be kind of a financial contagion in the bond markets.

NORRIS: Almost out of time, but just a multiple-choice question. We heard about the possibility of a financial meltdown - a real meltdown - is that hyperbole or real possibility - which one?

Mr. MATHEWS: It's hyperbole with an audience of both trained to create interest in tax increases and is a message to the Feds that we need some help.

NORRIS: Thank you. Thank you so much. That's Joe Mathews. He's with the New America Foundation. Transcript provided by NPR, Copyright NPR.

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