California Bankrupt?

Is the state of California bankrupt?  Well, an increasing number of politicians and economic analysts are answering that question in the affirmative.  The truth is that California is a complete and total economic disaster area.  The state government of California is projected to have a budget deficit of at least 19 billion dollars this year, and next year the budget gap is projected to grow to 37 billion dollars.  To put that in perspective, the entire budget for the government of California is only about $125 billion per year.  Already, California’s credit rating is the lowest of all 50 states, and there are persistent rumors that it is about to go lower.  If California’s credit rating is slashed, it will be very expensive for them to borrow the money that they desperately need.  Once upon a time, the state of California was the poster child for the American Dream, but now it is on the leading edge of America’s rapidly unfolding economic nightmare.


Leaders from both major political parties in California have been increasingly using the word “bankruptcy” in recent weeks.  In fact, California Attorney General Jerry Brown was very open about California’s horrific finances when he recently told a group of young Democrats the following….

“California is deeply in debt. You could say that it’s bankrupt.”

Jean Ross, executive director of the California Budget Project was even more direct when she recently issued the following ominous warning about California’s finances….

“We are on the verge of system failure.”

The truth is that California is literally drowning in a sea of red ink.  They keep making larger and larger budget cuts, but the financial problems just continue to get worse.

Already, the severe budget cuts are turning California into a shell of what it once was, and yet everyone agrees that even deeper cuts are needed.  But what will California look like at the end of this?  The new “normal” may look a whole lot different from the “California Dream” that once drew so many people to the state.  A recent article in the Globe and Mail put it this way….

Mass layoffs, slashed health and welfare services, closed parks, crumbling superhighways and ever-larger public school class sizes are all part of the new normal.

The biggest crisis of all may be the state’s pension fund.  CalPERS currently has about $16.3 billion more in liabilities than assets.  Not only that, but a state report released earlier this year says that California is also facing a $51.8 billion bill for the health and dental benefits of current and future state retirees.


So where in the world are the taxes going to come from to pay for all of these obligations?

It is hard to see a way out of this mess, especially considering the fact that California’s economy is coming apart like a 20 dollar suit.

Right now businesses are shutting down in California at an alarming rate.  In the region around Sacramento there is now one closed business for every six that are still open.

Not only that, but unemployment in California has reached unprecedented levels.  There are now 8 counties in the state that have unemployment rates of over 20 percent.

To put that in perspective, consider the following.  The number of people now unemployed in the state of California is equal to the populations of Nevada, New Hampshire and Vermont combined.

Yes, things really are that bad in California.

Nobody has a safe job anymore – not even teachers.  Just recently, the state of California handed pink slips to nearly 22,000 teachers across the state.

Can you imagine firing 22,000 teachers?

Unfortunately, firing all of those teachers barely even made a dent in California’s budget problems.

California Governor Arnold Schwarzenegger is pledging to seek “terrible cuts” in an effort to get California’s financial situation under control, but the truth is that there are not many more areas that can be slashed without voter approval.

Bob Herbert of the New York Times recently described California’s horrific budget crisis this way….

California has cut billions of dollars from its education system, including its renowned network of public colleges and universities. Many thousands of teachers have been let go. Budget officials travel the state with a glazed look in their eyes, having tried everything they can think of to balance the state budget. And still the deficits persist.

On top of everything else, California’s health care system is also on the verge of collapse.  In fact, literally dozens of California hospitals and emergency rooms have shut down over the past ten years.

Why have so many shut down?

The truth is that many hospitals and emergency rooms simply could not afford to stay open as they were endlessly swamped with illegal immigrants, unemployed Californians and homeless people who were simply not able to pay for the services that they were receiving.

As a result of these hospital and emergency room closings, the rest of the health care system in California is now beyond overloaded.  This had led to brutally long waits, diverted ambulances and even unnecessary patient deaths.

And unfortunately, the number of people in California who are unable to pay for their emergency medical care is only increasing.

According to one study, approximately 1 out of every 4 Californians under the age of 65 had absolutely no health insurance last year.

So could California actually go bankrupt?

Well, yes.

An article in Slate recently described how it would work….

Say the state can’t make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state’s debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors’ committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state’s budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)

Let us hope that this does not happen, but the truth is that California is facing a rapidly rising tide of red ink that it cannot possibly handle.  Without a massive amount of federal money, California finances are doomed.

But California is far from alone.  They are just on the bleeding edge of a horrific financial bloodbath.  State and local governments all over the United States are in financial panic mode, and as the U.S. economy continues to implode, things are only going to go from bad to worse.

So buckle up my friends – we are in for a bumpy ride.

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