California is working overtime to get into the “exclusive” club of soon-to-fail states.
What happens to a state in the United States if it does become bankrupt? Can they then be invited out of the Federal Union?
Or is this a “too big to fail” thing?
“What happens to a state in the United States if it does become bankrupt?”
That’s a great question. A partial answer is that it shows up as a cash flow failure. The available funds in the state treasury become insufficient to pay current obligations, which means paychecks and other regular payments. The state employees have to wait for paychecks as there would probably, at first, be delays in payments. This is where the feds come in and provide loans to cover shortfalls (I am guessing this is what would happen). It would probably take a long time to balance revenues to payments again. New projects might not be proposed. Hiring freezes would become policy in state agencies. Road repairs on state roads would be reduced or stopped. If there are state bonds, payments might be delayed and the value of the bonds would drop as credit ratings dropped. If this situation persisted, defaults on bonds could occur. Schools could be consolidated (as is frequently proposed in places like NYS now).
These things could be avoided, of course, by reducing spending now, but the politicians in office now have no incentive to do that because voters don’t blame them for future economic problems that won’t occur for years to come. However, the current politicians are responsible because they are the ones spending and promising more gifts to current voters.