Here's a memo we wish we had read:
To: Wall Street banker

From: A concerned California bond buyer

California is fast approaching D-Day on its budget crisis, and it looks more and more like the "D" stands not for "decision," but for "dump, dodge, delay and defer."

Politicians from both parties want Wall Street firms such as yours and bond buyers like me to lend them upward of $10 billion to paper over the yawning chasm between the services that Californians demand and the taxes they are paying. Unable to make decisions that displease voters and stymied by the state's unworkable budget rules, they want to put off a reckoning and pray that California's economy will grow them out of their budget mess.

I don't need to remind you that, with a two-year deficit grown to $30 billion or more, the state is skating close to the financial edge. However, the larger threat is not fiscal collapse but political bankruptcy. By a combination of weak leadership, special interest domination of politics and legal straitjackets, many of them imposed by initiative, California has become nearly ungovernable. And a state that's ungovernable is not the best place to put my money.

So here's my bottom line: No prudent person will rush out to buy California rollover bonds without solid evidence of fiscal responsibility and basic structural reform in the state's broken political system. Before I buy a California bailout bond, I need assurance of change:

A real budget. -- The state got deep in its hole by using the huge run-up of revenue from capital gains and stock options in the 1990s stock market bubble to cut taxes and raise spending. The result is a permanent structural gap in the budget that amounts to about 20 percent of its general fund. If California wants to borrow from me, it must show me a budget agreement that closes that gap. That will require not only a temporary tax increase to cover the cost of any borrowing, but also permanent restoration of the revenues imprudently cut in the 1990s and a real plan to bring spending in line with those revenues.

Governance reform. In his original budget, Gov. Gray Davis vowed he wouldn't sign a budget without structural reform in how California manages its finances. Then he disappeared into a hole. Now it's up to you and me to insist state government makes good on that pledge.

The state needs to get rid of its rule requiring a two-thirds vote for budget or tax bills. It needs a budget system that diverts revenue in boom years into a rainy day fund to be drawn down in lean times. It needs pay-as-go budget rules that require new spending or tax breaks to be twinned with the corresponding revenue increases or program cuts to pay for them. Before lending my money to California, I want a system in place that assures me the state won't dig the hole deeper next year.

An economic tune-up. -- For all its short-term woes, California remains an engine of the world economy. In the long term, its strengths are unmatched anywhere else in the world. But no engine can work at its peak efficiency when encrusted with costs imposed by special interests.

Since the security of any loans to the state is linked to the health of the economy, a borrowing deal must include basic business reforms of the kind passed in the early 1990s, the last time the state suffered a recession. Examples: Overhaul workers' compensation to cut out the middlemen; end the prevailing wage rules that drive up the cost of housing; streamline environmental laws with an eye to focusing on outcomes instead of process.

It's never been easy for politicians to deliver bad news to voters. But I worry that, in California, it's become nearly impossible. Our erstwhile leaders have told us for so long that we can have something for nothing that we've come to believe it, and anybody who suggests otherwise, as the governor did in his budget, gets beat up politically.

It looks like the only people who can enforce the reality principle this year are those with the money the state needs. So drive a tough bargain, because I'm not lending my money to a state addicted to irresponsibility.