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Though USZ law prohibits states from declaring bankruptcy, it could be California's best option for getting out from under a USZD 25 billion budget deficit, analysts say. Recent pressures for a change in the bankruptcy law come as California's financial future looks even bleaker than it did the previous year. The state's budget deficit continues to increase and the unemployment rate shows no sign of dropping. Declaring bankruptcy could be the best path for the state to get out of its crushing debt and move toward recovery. Economists say other California municipalities are already taking advantage of bankruptcy protection. The city of Vallejo and Orange County both filed for bankruptcy and are emerging with an improved financial situation. But some economists say there is a big difference between a city and a state and California already has the lowest credit rating in the USZ.
California Treasurer Bill Lockyer has already dismissed the idea of filing for bankruptcy, saying it would limit the state's ability to create jobs and to secure future investments. However, proponents of the bankruptcy option say it will give California leverage when dealing with the public employee unions. The state has a massive unfunded pension liability and the threat of bankruptcy might encourage unions to agree to reduce packages. But economists say bankruptcy would not address the main reason California is in financial turmoil. Republicans are expected to introduce the bankruptcy legislation within the next 30 days. Experts say even if the bill is passed, it would take at least two years before states would be able to file.
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