States, such as California, are not allowed to declare “bankruptcy”:
Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn’t include states. (The statute defines “municipality” as a “political subdivision or public agency or instrumentality of a State”—that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11th Amendment, which means they can’t be sued. In other words, they don’t need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum.
How California will can escape its debts? Receivership.
Say the state can’t make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state’s debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors’ committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state’s budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.) (Source: Can California Declare Bankruptcy?)
When If California goes into receivership then something like this will can happen:
Motion to force Prichard to pay pensioners denied by judge
(Source: Prichard, AL, March 10, 2010)
A bankruptcy court judge for Prichard, the second-largest city in Mobile County, AL, denied a motion Tuesday that would force Prichard to pay its pensioners, saying they do not qualify as administrative claims — or day-to-day obligations — of the city.
A group of pensioners, who have a civil lawsuit pending against Prichard, asked U.S. Bankruptcy Court Judge William Shulman to include the pensioners. “They are unable to pay for their basic life essentials,” Alexandra Garrett, a lawyer for the pensioners, argued.
The last check pensioners received was in September. The city filed for bankruptcy in October.
[Failure of government to honor pension obligations in Prichard, Alabama] should serve as a clarion call to anyone expecting money from [their] pension plan. Unless you’re going to die soon, don’t count on getting all of it. Politicians are under no obligation to fund their promises and when the trust runs out of money nobody is going to bail it out. (Source)