Note that only governments that can print money can use your second model. So in the USA, only the Federal govt. California only has access to the first model, and could go bankrupt and/or default on bonds.
US states are sovereigns and so they can't literally go bankrupt. But they can become insolvent and cease paying on their obligations. Based on current credit ratings, if any state is going to become insolvent it's more likely to be Illinois than California.
