Is Bankruptcy the Best Solution for California’s Budget Problems?

BY Lea Winerman  February 3, 2010 at 2:27 PM EDT

Question: I wonder if going into bankruptcy would be the best solution for California’s budget deficit problems. Wouldn’t bankruptcy allow for the renegotiation of contracts between the state and, say, labor unions? Pensions and entitlements seem to be a huge part of the overall problem.

Paul Solman: I think you’re right on target, Ms. Handlery. Several of my California friends have been rooting for the outcome you imagine and it came up on a number of radio shows I did there during the last acute phase of the crisis.

Here’s the problem, though:

A large and growing portion of the state’s contractual commitments are to pensioners, among whom, full disclosure obliges me to reveal, is my sister. That’s after 30 years in the LA County school system as a bi-lingual pre-K teacher to mostly Hispanic-American students — a spectacular teacher, if the testimonials of her principal, present colleagues, and former students were to be believed. (Her funniest former student is TV’s Carlos Mencia. My sister’s pretty funny herself.)

But quite apart from whether my sister has earned her pension, California has a legal obligation, written into its state constitution, to pay employees what they’ve been promised before anyone else. The state would first have to DEFAULT on its bonds, far from an impossibility, as I pointed out here last spring.

Look, there are three major interest groups playing a game of chicken in California: its taxpayers, its employees, and its lenders. (Its vendors and social welfare recipients have little leverage in the game.) My guess is that the lenders are likely to take the next hit. No guesses at all after that. But like most iterations of chicken, the blinking will probably come late in the game.