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Will Los Angeles Go Broke?

California is in a state of pain.

But at least the state has some room to maneuver.

This week State Controller John Chiang said receipts in January were $480 million above estimates, and it looks like the state will not have to delay income tax refunds this year.

Today California Treasurer Bill Lockyer is holding a much-advertised $2 billion bond sale to help fund voter-approved infrastructure projects, and in a sign of growing confidence that the Golden State will not default, investors are pouring in.

Part of the reason for that confidence is the Legislature has given Chiang flexibility in doling out cash.

On the losing end of that flexibility may be cities and counties, as the state could delay monies owed to those smaller governments in an effort to calm any concerns by bondholders.

That's not good for Los Angeles.

The City of Angels is facing a $200 million budget deficit in the current fiscal year which will grow another half billion next year. The city will owe $399 million next year just in debt service, and it faces about $6 billion in underfunded pensions and healthcare costs for its retired employees.

Los Angeles Mayor Antonio Villaraigosa promises the city will not go bankrupt.

But should it?

Even he admits that public employee unions are not willing to take the pay cuts necessary to avoid up to 4,000 layoffs, and there's nothing legally that can be done outside of bankruptcy to reduce obligations to retirees. It's not clear what could be done inside bankruptcy either.

Mayor Villaraigosa sat down with me this week to talk about the city's financial outlook. He explained, among other things, why he cannot do what San Francisco's Mayor Gavin Newsom did last week.

Newsom fired thousands of city workers and immediately rehired them at 37.5 hours a week with full benefits.

I also spoke with Joel Kotkin, Distinguished Presidential Fellow in Urban Futures at Chapman University and author of "The Next Hundred Million, America in 2050".

He says LA and California are attached at the hip, and both are sinking unless something can be done about commitments to public employees.

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  • Based in Los Angeles, Jane Wells is a CNBC business news reporter and also writes the Funny Business blog for CNBC.com.

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