If California voters decide to split the state in three -- as billionaire Tim Draper has proposed -- it would roil the $3.8 trillion municipal-bond market.

The venture capitalist’s initiative to break California into three states qualified for the November ballot, state election officials announced late Tuesday.

Voters look over their voter registration forms at the City Hall polling station in San Francisco, California, U.S., on Tuesday, June 5, 2018.
Voters cast their ballot in California's June primary. In November they will decide on a measure proposing to split the state into three new states.

If approved by the voters and the U.S. Congress, the arrangement would impact the municipal market. That’s because California, which has $74 billion of long-term debt outstanding, is the largest U.S. seller of bonds financing state and local government operations.

Under Draper’s measure, California’s debt would be distributed among the three states based on the population. But investors won’t get a say in that.

The measure calls for three smaller state governments: Northern California, encompassing San Francisco and 39 other counties; California, covering Los Angeles and five other counties; and Southern California, accounting for areas including Fresno and San Diego.

A California split is a long shot, to say the least. Even if voters decide Draper’s idea is a good one, there hasn’t been a breakup of a state since the Civil War. Government law experts say a plan would probably require an act of Congress -- and it’s unlikely Republicans in Washington would welcome the idea of potentially adding more solidly blue states.

In the far north region of California, some residents have pushed to form a new state with parts of southern Oregon, and wouldn’t be keen on being lumped together with liberal San Francisco as envisioned by Draper’s map. While California’s differences run deep, they may only be heightened in closer quarters.

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