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Is Sacramento America’s Greece? California Debt Crisis is an Economic Time Bomb

May 24th, 2010

While bankrupt Eurozone nations are forced to sink deeper in debt to bailout Greece and other countries using the euro that are in even worse fiscal difficulty, a similar absurdity is becoming ever more likely in America. The virtually insolvent U.S. federal government may be forced, sooner rather than later, to bailout its most populous state. California is fast descending into a fiscal sinkhole, with no resolution in site.

In 2009, California “solved” its massive $26.3 billion state budget deficit through a combination of budgetary cuts and accounting gimmicks and other games, the only “solution” offered by  Governor Arnold Schwarzenegger and the dysfunctional state legislature.

In 2010, California’s fiscal woes are back with a vengeance. Even after the budget cuts of 2009, the state is now faced with a $19 billion deficit. While contemplating savage cuts in  public services, the state is faced with the absurdity of being compelled to add another $600 million to its extravagant pension program for its public workers. The state employees pension fund lost more than $55 billion during the financial implosion that erupted in the fall of 2008, and expects California taxpayers to make up for the shortfall.

At some point, California will be unable to borrow funds  at sustainable rates, replicating the ordeal Greece recently endured. At that point, it is likely that a California delegation will be speeding on its way to Washington DC, demanding that all the taxpayers in the other 49 states assume responsibility for bailing out Sacramento. The problem with this stratagem is that most of America’s states are facing immense fiscal challenges.

How do in fact the bankrupt bailout the insolvent? In the near future, this will become a far from academic exercise confronting policymakers in Washington.

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