They can simply say "your student-athlete is ineligible to participate."
Can California create their own league?
Sure.
Will doing so decimate their schools' athletic budgets? Probably. There's not going to be much national demand for a state-only organization, and it's going to get particularly ugly when the feds discover schools colluding with rich boosters talent in order to attract them there because of Title IX.
Uh, this would be true of many states but not of states like CA/TX/FL.
There would absolutely be demand for a CA-only athletic organization.
There's a reason California did this and not, say, Alaska (no offense to Alaska of course).
One of the foundational reasons that the WWF / WWE became the dominant power in the wrestling market is that they were the first to ignore regional barriers.
Rinse, repeat.
[0] admittedly, minor confused conferences like Conference USA and Big 12 stretch the definition a little bit, but they're still essentially regional.
Er, we're talking about them right now. College sports are extremely regional but still have significant national appeal. Many, many people tune into SEC conference games who have no connection to the SEC.
If you think people wouldn't watch an SEC-only league (I'm using the SEC here because it's the most obvious example), then I think that betrays your knowledge of college sports.
A state-only organization the size of California can easily compete especially when any player in any sport with financial planning would move to California.
Why would anyone watch the NCAA in football, basketball or anything else when we'd know all the best player are in the California League.
Also, the point is that rich boosters colluding wouldn't be illegal. This wouldn't have anything to do Title IX. I do agree those rich donors will pull all the best talent to California though.