Don't Panic About California Defaulting

... because it doesn't seem likely, given the state's constitution, writes Jamers Altucher in a column earlier this year.

The California constitution mandates that education costs be paid first out of any revenue coming in. California has about $90 billion in revenue. About 40% of that goes to education. After that, as per the California constitution, all debt payments have to be made. After that, California can spend on whatever it wants: police, landscaping, random buildings, etc. Debt service payments come to about $5.5 billion per year. In other words, each year California makes its debt payments, with an extra $50 billion to spare. This is why it has no problems refinancing and why municipal bond yields are at record lows. Most states have similar clauses in their state constitutions: that debt service payments come before anything else.

I know I'm a broken record on this, but it reinforces what I've been saying since the elections - Jerry Brown's victory was the high water mark for progressives. When California can't pay its bills, it doesn't default on its bonds, it whacks its services and employees. And who has the largest chunk of the slashable budget?

And the big winner is ... Health and Human Services! Let's hear a big round of applause for the unsustainable social programs!
In the comments of that article is this contrarian view:

As a investor, I have one simple question to ask - where is the money? Lets check - States like California are not independent countries like Greece - they are part of the US - so factor in Federal debt to the equation. State + Federal + muni debt. So where is the money to pay for all this debt? I expect a default. You can not tax people who do not have the money.

I don't see how this disproves the author's point. The bond servicing payments don't seem so large that the objection, "Where is the money" will ever come into play. With businesses leaving the state, there's no question that raising more taxes will prove to be fruitless, but that still doesn't lead to insolvency in terms of debt servicing. Insolvency will lead to an employee and benefits crisis instead, which is what we've been seeing with furloughs, mandatory days off without pay and the state issuing IOUs in lieu of benefits checks.