What if california goes bankrupt

Cities have, on rare occasions, declared bankruptcy. The largest and most recent was Detroit in No state has ever done so, however. In part this is because almost every state has some sort of balanced budget requirement in its constitution.

This means that they cannot take out debt to cover unfunded obligations, and as a result have rarely found themselves in a position to need bankruptcy protection. Any effort to legalize state bankruptcy, or commence one, would likely spark numerous legal, economic and political issues. Regardless of whatever federal law Congress might pass, if courts find that state constitutions control the issue then those states might be required to balance their books without the bankruptcy courts.

Constitution, nor under the long-standing judicial principal of refusing to rule on inherently political questions. Thirdly, the U. Constitution contains a section called the Contracts Clause. This bars states from breaching contracts with or between private citizens. This is to prevent states from abusing their control over the police and judicial system during contract disputes. It would apply to existing obligations, such as employment contracts and pensions.

Any state bankruptcy law would need to deal with this potential conflict. Courts may find a law that lets states walk away from their existing obligations, as bankruptcy is designed to do, unconstitutional on this basis. States are dealing with an unprecedented budget crisis brought on by a black swan event that has triggered a severe recession. In theory they could raise taxes to cover their revenue shortfall.

However, doing so would make life more expensive for citizens already struggling with the same wide-reaching crisis. They could also cut costs by laying off workers such as firefighters, police officers, teachers and civil servants, as state governments did in the wake of the financial crisis of However, that would add to the ranks of the unemployed and remove money out of increasingly weak consumer markets.

States have near-plenary power to raise revenue and cut spending. The issues are economic and political. The result is political gridlock. Join thought-provoking conversations, follow other Independent readers and see their replies. Want to bookmark your favourite articles and stories to read or reference later? Start your Independent Premium subscription today. Already subscribed? Log in. You want to send an international message the economy is in trouble?

So McConnell would have to change the law. Municipalities have been allowed to declare bankruptcy since , but the only option for states is just to not pay their debts. Jim Saska at Roll Call explained :. But bankruptcy is a legal process in which a person, company or municipality reorganizes its debts. Companies also have the added option of shutting down and selling assets to pay off as much of the debt as possible. One reason for bankruptcy to be unavailable to states is that they have the ability to raise taxes, and thus get the money to pay their debts.

State bankruptcy thus risks being used for political purposes. States defaulting on their debts is rare — the last time it happened was Arkansas in during the Great Depression. To back up a bit, the first state to put in place a balanced budget amendment in its constitution was Rhode Island in , and other states followed. Arizona and Indiana ban taking out debt altogether, also de facto requiring a balanced budget. But they become an issue in times of crisis. The options states are left with: They can cut their spending, or they can increase revenue, or do some combination of those things.

The problem right now is that the ways states usually generate revenue — sales and income taxes — have fallen off of a cliff, and spending on responding to the crisis in areas such as health care and unemployment has skyrocketed. And so states wind up making cuts where they can: They lay off and furlough public employees, meaning teachers, police officers, and firefighters; they make cuts to K and higher education; and they scale back infrastructure spending, among other mechanisms.

That creates an even bigger drag on the economy, making the downturn worse and the recovery slower.