What happens when/if a state goes insolvent/bankrupt?

[MyLittleWonders]

So, living in CA, this is pretty much major news right now. I think we are heading quickly to that place of fire and brimstone in a basket at break-neck speeds. hat happens when a state is insolvent and/or declares bankruptcy? Especially, what happens when the country doesn't seem to have two pennies to rub together to help? Dh is a teacher; his pay is pretty much dependent upon the state having money to fund the districts. He is fine for this school year (his district is very conservative in terms of money - they keep all payroll in an account all year that is only touched for payroll so teacher's are guaranteed pay throughout that current school year; the next year is unknown). But, we still don't know what next year will bring (and the district won't even begin contract negotiations until October, so we will more than likely be looking at a retroactive pay decrease assuming the state has money to give the districts).

So, given that even those paid by the government are hanging by a thread in terms of actually being able to be paid long-term, what happens when an entire state goes bankrupt? What does that mean for us common citizens?

[Violet2]

Breakdown of services.

Increase in fines and penalties and service costs, anything they can do to generate income.

Long lines at bureaucracies due to lack of staff.

No money for payroll once current payroll funds run out.

Choosing between staffing police or schools.

Nationally, we will likely print money to try and get out of the hole and spark inflation.

Although I heard Hilary Clinton is going to Asia to beg for money. If that pans out we'll be in slightly better shape. Lots of debt, but not so much inflation. For now.
V

[Denvergirlie]

Unknown really, we have no history to turn to in this case.

Worse case, all state provided services stop... no police, no fire department, no state run hospitals, no schools, no social services of any kind.

Survival of the fittest.

I can't imagine that occuring thou, or at least not in the near future.

What will occur most likely, delayed pay, reduced services, gov't employees losing jobs, pay cuts.

Less cops on the street, but those that are there will be writing more tickets in order in increase revenue. Health code inspections might go up, more fine's can be levied.

The state is basically a big company. Lots of companies go into bankruptcy but are still about, look at the airlines.

Declaring bankrutpcy allows the courts to step in and settle on debts. Some of the vendors owed money by the state might not get full payment and they in turn take a loss (which can start the cycle again in that company and thus the cycle starts again and again and again).

From what I read on CA, the dropping revenue has lead to an unbalanced budget. Some lawmakers want to raise taxes to cover the difference, the other lawmakers think raising taxes in the current economy is insane, thus the state is at an impass.

The federal gov't could also print some more money out of thin air and give/ loan it to the state. It's a band-aid thou as printing more money leads to inflation and the prices of goods and services in turn rise again, making the purchasing power of the dollar even less.

These states need to make budget cuts just like you and I. yes, it might "hurt" but it's called dealing with reality.

Perhaps some others can chime in, as these are just thoughts since we have no US history to turn to in this case. However, there might be others on MDC that can speak from perhaps a European stand point and might have seen a small country fail and give a better idea of what some of the possibilites might really be.

[slsurface]

Well, this sort of thing has happened a couple times in recent history here in Michigan. When the fiscal year ended in 2007, the legislature threatened to close ALL state offices and programs if the budget wasn't resolved. Fortunately, they got over their bipartisan bickering and passed a budget that wasn't in the red. I think Cali is like Mi, in that the state constitution will not allow a budget that is not balanced. What usually happens here when they cannot get the budget to balance is that a bunch of state employees get laid off and many services are cut or put on hold. It's not fun.

[MyLittleWonders]

Yes, we have to have a balanced budget per our constitution. What I don't understand is how can a "balanced" budget continue to add to the state's deficit? That just is mind boggling to me. What makes us extra unique is that our budget requires a 2/3's vote in both houses. And yes, it is a Republican hold-out in the Senate because of the tax hikes (which personally I also think are ridiculous in such a bad recession; we simply cannot afford to bailout our state). I guess the federal stimulus to our state might also be delayed if we do not pass a balanced budget. It's all a mess. Thank you all for chiming in as to what happens when a state theoretically declares insolvency or bankruptcy. It doesn't sound good, especially in the face of national economic issues (let alone international). No matter what, it doesn't look very good it seems.

[Delicateflower]

A Republican's dream, no government.

[AngieB]

I'm in CA and I'm trying not to get to worried. This seems to happen every year. Congress fights and fights over the budget and somehow it always works out. The people in congress want to be re-elected they are not going to let the state of CA fall apart. I feel that this is more about making a good news story than anything else.

[annethcz]

Originally Posted by Delicateflower

A Republican's dream, no government.

In general, republicans are in favor of smaller government. They don't advocate for no government.

But in any case, I don't think the state government will disappear completely.

[Denvergirlie]

Deleted -



Letting the OP try and stay on track with her questions and concerns about her state.

[sagewinna]

Originally Posted by AngieB

I'm in CA and I'm trying not to get to worried. This seems to happen every year. Congress fights and fights over the budget and somehow it always works out.

This. I have lived in Ca. for 25 years and this is an old, old song and dance. Once they get enough pressure from the voters they'll work together better to pass a budget. It irks me that we have been through this so many times, and that they will cut funding in the wrong places (education, etc).

[MyLittleWonders]

Not that I want CA to go bankrupt, but there is a part of me that is glad people are speaking out about the tax hikes. I've lived here my whole life. I know they do this type of song and dance pretty much each year. But this year, in my opinion, is different. And since I want to keep this thread on topic with the forum, I posted mainly because I was curious what would happen if we go insolvent. I just feel this time is a little different than the many years past where budgets were very long in being approved.

[lolar2]

A friend of mine (so this is a bit of a game of Telephone, I'm not 100% sure of it) told me that during a CA budget crisis a decade or two ago, UC professors received IOUs for their salaries. The banks honored something like 40% of it. So from the professors' perspective, it was a 60% pay cut, but actually the banks even ate the cost of the 40% they paid out because the state never paid back the banks, at least not the full amount. Last I heard (on the local radio news this morning), there was a lot of talk of pay cuts.

[AngieB]

I'm listening to NPR and they just reported that the budget has passed. I'm not sure if it's in both houses or just one.

[ginger_rodgers]

As for OP's concern, you can assume all bets are off. The district will very likely do its best to keep everyone on, even if at reduced pay and higher workload. It may not be possible.

As for the rest of the state...well, corruption and crime are usually bigger problems when there's no money for law/code enforcement. Other than that, you should just get used to hearing "no" a lot. No, the library is not open. No, the city pool is not open. No, this bridge will not be reopened anytime soon, go around. No, this children's program is not running. No, we are not currently accepting new enrollees, there's a waiting list. If you have legal issues going on, you can expect your wait for a judge to get longer.

[MyLittleWonders]

Well, it seems that the state passed the budget. I have mixed feelings on it all, but that probably belongs in a different forum.

[Denvergirlie]

Also, have to remember that just because the state might become insolvent, your county and/ city or won't necessarily go insolvent at the same time.

State troppers might be effected, but not ncessailry county or city cops.

Granted the state pays into countries and cities, but a particaulr city or country might be in better shape and could have cash reserves to pull upon.

[lolar2]

Aaaaand we have a budget!

[prettyflwrs]

so now that CA has a budget, do we know what is being cut? and how much?

personally I am wondering how badly education got cut?

[MyLittleWonders]

Originally Posted by prettyflwrs

so now that CA has a budget, do we know what is being cut? and how much?

personally I am wondering how badly education got cut?

This is an interesting chart of proposed cuts by distrcit. From what dh has said, it sounds like the federal stimulus will not be enough to make up for the cuts to the districts, so districts still are looking at having to cut pay/teachers/benefits - either some of the above or all of the above.

[prettyflwrs]

Originally Posted by MyLittleWonders

This is an interesting chart of proposed cuts by distrcit. From what dh has said, it sounds like the federal stimulus will not be enough to make up for the cuts to the districts, so districts still are looking at having to cut pay/teachers/benefits - either some of the above or all of the above.

Thanks. That is a interesting chart.

DH's district is threatening layoffs and with DH being a first year teacher we are stressing a bit. It is all so frustrating. I was really hoping that the gov. would pass a budget that did not cut schools too much.