The state has greatly reduced its cash infusions to the University of California system, and recently the university’s regents voted to increase fees (California’s code word for “tuition”) 32%.  This has led to a strike at Berkeley and to student demonstrations and to the take-over of some buildings there and at Santa Cruz.  This planned tuition hike comes on the heels of layoffs and furloughs and salary cutbacks of many university employees.

Recently, the Academic Senate at Berkeley voted to end financial support for the Department of Intercollegiate Athletics.  The Senate even had the gall to ask the Athletics department to repay a loan of $5.8 million.  Nothing is sacred anymore!  But nothing to fear—I bet the regents will save Berkeley football before it saves the classics department.

The state of affairs at Berkeley will be watched all over because many other public universities are not much different.  It is only a matter of time when they too will be faced with the question of how to endure economic sacrifice.

But, it won’t be all bad.  Such difficult times provide moments when society can rethink its goals and strategic priorities.  How many research universities do we really need in this country?  How many administrators do we really need to protect the interests of Croatian students or to assist those who wish to preserve the heritage of Bon Jovi or to supply counselors for those trying to give up Law and Order?  And does every town with a population of at least 1,000 really need a branch campus?

The state of California itself is much worse off than Berkeley.  Given the state’s penchant to provide welfare to everybody who can generate a creative excuse for an entitlement, it was only a matter of time before the state’s budget was so out of whack even Alec Baldwin and Barbara Streisand could acknowledge it.

State legislators and governors over the last 10 to 20 years are to blame.  Not only do they not understand the word “NO” when it comes to spending, they were very short-sighted when it came to revenue generation.  They thought the dot-com slush funds would continue to be created out of nothing, though physics and economics indicate otherwise.  They then did want virtually every politician does—they are so without original ideas!—they raised taxes on corporations and rich people.  Unfortunately, the legislators and governors forgot that corporations and rich people can move, and indeed enough of them have left the state, leaving California in serious trouble.

The woes are so great that it is easy to predict that California will become the first state in U.S. history to declare bankruptcy.  I put the odds at least at 50 percent in 2010.

Then the fun begins.  California, before or shortly after entering Chapter 11, will ask for help from Washington.  While the Obama administration and the Congress likely will administer CPR to the state finances, they really should just admit that the state is insolvent.  The moral hazard is huge.  If Washington provides assistance, there will be 49 states that will quickly follow suit.

The bankruptcy process itself will be interesting because nobody will know what to do with a state.  Creditors might try to win concessions about the state’s budgeting process or membership to state agencies that make economic decisions.  They will also attempt to rewrite existing contracts.

The biggest effect will be on bond yields.  Any bankruptcy will shoot rates up and this will make future governmental borrowing hard and expensive for all governmental units.

Taxpayers will face a major nightmare.  Taxes will skyrocket for those who are not fortunate enough to be retired.  Maybe taxpayers will even wake up and realize that they have elected nothing but economic idiots for quite some time.  But what do you expect from a state that thinks actors actually know something?

I just love California dreamin’.