19 Jan Is California Going Bankrupt?
John Chiang, the chief financial official in California, has recently announced that California may not be able to pay billions of dollars in income tax refunds. It seems that the sunshine state is running out of money. Social service programs are going to take an immediate hit, as will student loans, tax refunds and other non-essential services. Will California be the first state to fall into bankruptcy? This is an ironic turn of events for a state that claims some of the wealthiest and most well known personalities in our country.
The California constitution requires the state to balance its budget. Unlike the federal government, it can not create money by administrative fiat. Now that Wall Street brokers are in bankruptcy themselves, states like California, that run out of money have no place to turn for commercial borrowing.
California is often the first state to come up with an innovative solution to a difficult problem. Will California be the first state to send out IOUs instead of tax refunds? If the state fails to send checks to its citizens, the financial ramifications could be severe. With less money to spend, California taxpayers would put less money back into circulation. This would be a reverse stimulus in one of the largest economic engines in our nation.
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