Why doesn't California just file bankruptcy? (credit rating, unemployment, gated)

[killer2021]

When a corporation or business is having difficulty with excessive debt or hardship they can file many different kinds of bankruptcy either to shut the business down or reorganize. Governments have the same power.

California is burdened with over bloated liabilities and excessive debt.

That way California can dump the liabilities, reorganize the debt and start fresh.

Thoughts?

[EscapeCalifornia]

Because there's no law that allows it.

[killer2021]

Originally Posted by EscapeCalifornia

Because there's no law that allows it.

Obviously I was suggesting that the appropriate laws be drafted to allow such.

[esmith143]

Originally Posted by killer2021

When a corporation or business is having difficulty with excessive debt or hardship they can file many different kinds of bankruptcy either to shut the business down or reorganize. Governments have the same power.

California is burdened with over bloated liabilities and excessive debt.

That way California can dump the liabilities, reorganize the debt and start fresh.

Thoughts?

Bankruptcy is the way to go when your financial state is so dire that investors won't lend you any more money, because they don't believe that you'll ever be able to repay them; or charge you sky-high interest for your money. It is the last resort move.

California is nowhere near that situation. All the talk of "bloated liabilities and excessive debt" is mostly right-wing propaganda. We're having short-term cash flow problems caused by the recession. Markets recognize that. California state general obligation bonds maturing 10 years from now trade at the yield of 4.6%. That's about 1% more than 'riskless' Federal 10-year treasury bonds. (By comparison, 10-year Texas general obligation bonds trade at 4.15%. In contrast, Greece does have long term budget problems, therefore, Greek 10-year bonds trade above 12%.) 4.6% is very low by historical standards and CA should have no problem financing its current deficit, as long as it makes some meaningful moves towards balanced budget when unemployment returns to normal.

The biggest problem with bankruptcy is that it deprives you of the ability to borrow money. So you might cram some pay cuts down unions throats, most likely not enough to balance the budget, but you won't be able to run deficit at all, so you have to take severe and painful cuts to balance the budget NOW. Not a good idea. Balancing the budget when unemployment is 10% is quite silly and tends to produce the effect that's opposite of what's intended: you lay off state workers, they stop spending money and join the welfare rolls because there are no jobs for them, your tax receipts fall and your social net expenditures go up, you end up poorer than you were and your credit rating goes down as well. (Of course, the same goes for the Feds and the GOP's silly attempt to cut spending now now now. If they get more than half of what they are asking in budget cuts, there's a real risk of a double-dip recession.)

On the other hand, a wise government would negotiate some pay cuts, cut some services, borrow $10 billion from Wall Street, end up in a much better situation and with its credit rating intact.

[bhcompy]

Originally Posted by esmith143

Bankruptcy is the way to go when your financial state is so dire that investors won't lend you any more money, because they don't believe that you'll ever be able to repay them; or charge you sky-high interest for your money. It is the last resort move.

California is nowhere near that situation. All the talk of "bloated liabilities and excessive debt" is mostly right-wing propaganda. We're having short-term cash flow problems caused by the recession. Markets recognize that. California state general obligation bonds maturing 10 years from now trade at the yield of 4.6%. That's about 1% more than 'riskless' Federal 10-year treasury bonds. (By comparison, 10-year Texas general obligation bonds trade at 4.15%. In contrast, Greece does have long term budget problems, therefore, Greek 10-year bonds trade above 12%.) 4.6% is very low by historical standards and CA should have no problem financing its current deficit, as long as it makes some meaningful moves towards balanced budget when unemployment returns to normal.

The biggest problem with bankruptcy is that it deprives you of the ability to borrow money. So you might cram some pay cuts down unions throats, most likely not enough to balance the budget, but you won't be able to run deficit at all, so you have to take severe and painful cuts to balance the budget NOW. Not a good idea. Balancing the budget when unemployment is 10% is quite silly and tends to produce the effect that's opposite of what's intended: you lay off state workers, they stop spending money and join the welfare rolls because there are no jobs for them, your tax receipts fall and your social net expenditures go up, you end up poorer than you were and your credit rating goes down as well. (Of course, the same goes for the Feds and the GOP's silly attempt to cut spending now now now. If they get more than half of what they are asking in budget cuts, there's a real risk of a double-dip recession.)

On the other hand, a wise government would negotiate some pay cuts, cut some services, borrow $10 billion from Wall Street, end up in a much better situation and with its credit rating intact.

The problem is that states cannot issue money, and most of them are obligated by their constitution to have a balanced budget. California is one such state. Financing debt until the recession clears out technically isn't an option the state should have, since it requires an unbalanced budget.

[esmith143]

Originally Posted by bhcompy

The problem is that states cannot issue money, and most of them are obligated by their constitution to have a balanced budget. California is one such state. Financing debt until the recession clears out technically isn't an option the state should have, since it requires an unbalanced budget.

That does not sound right. Such an obligation would preclude the state from ever issuing bonds, yet I clearly see CA general obligation bonds on finance.yahoo.com.

Edit: it seems that there is, in fact, a requirement for the state government to run a balanced budget, courtesy of Proposition 58 (2004). (Way to go to shoot yourself in the foot, voters!) Which is still strange, since I saw advertisements for CA bond placements as recently as last year.

[nullgeo]

Originally Posted by esmith143

Bankruptcy is the way to go when your financial state is so dire that investors won't lend you any more money, because they don't believe that you'll ever be able to repay them; or charge you sky-high interest for your money. It is the last resort move.

California is nowhere near that situation. All the talk of "bloated liabilities and excessive debt" is mostly right-wing propaganda. We're having short-term cash flow problems caused by the recession. Markets recognize that. California state general obligation bonds maturing 10 years from now trade at the yield of 4.6%. That's about 1% more than 'riskless' Federal 10-year treasury bonds. (By comparison, 10-year Texas general obligation bonds trade at 4.15%. In contrast, Greece does have long term budget problems, therefore, Greek 10-year bonds trade above 12%.) 4.6% is very low by historical standards and CA should have no problem financing its current deficit, as long as it makes some meaningful moves towards balanced budget when unemployment returns to normal.

The biggest problem with bankruptcy is that it deprives you of the ability to borrow money. So you might cram some pay cuts down unions throats, most likely not enough to balance the budget, but you won't be able to run deficit at all, so you have to take severe and painful cuts to balance the budget NOW. Not a good idea. Balancing the budget when unemployment is 10% is quite silly and tends to produce the effect that's opposite of what's intended: you lay off state workers, they stop spending money and join the welfare rolls because there are no jobs for them, your tax receipts fall and your social net expenditures go up, you end up poorer than you were and your credit rating goes down as well. (Of course, the same goes for the Feds and the GOP's silly attempt to cut spending now now now. If they get more than half of what they are asking in budget cuts, there's a real risk of a double-dip recession.)

On the other hand, a wise government would negotiate some pay cuts, cut some services, borrow $10 billion from Wall Street, end up in a much better situation and with its credit rating intact.

Excellent post ... what a unique occurrence on the California Forum

[DMenscha]

The California Constitution Prohibits it. Therefore it would take a Constitutional amendment to change it.

As my friends from the UK would say "Not Bloody likely"

[18Montclair]

Originally Posted by DMenscha

The California Constitution Prohibits it. Therefore it would take a Constitutional amendment to change it.

As my friends from the UK would say "Not Bloody likely"

Right.

Bankruptcy is strictly a reference to a state's inability to pay its debt obligations and California is nowhere near a position where it can't do that.

I just read that esmith143 already explained it.

Bankruptcy is not even a concern but the media really plays fast and loose with that term. Its ridiculous and totally misguided.

Think about it? People file for bankruptcy when they can't pay their creditors, not because they are hungry. There is a difference.

[Shope]

Aren't California's bonds considered junk bonds?