House GOP Leader: No Bankruptcy For States

House Majority Leader Eric Cantor is shooting down the idea of modifying the Bankruptcy Code to allow states to file for bankruptcy protection:

House Majority Leader Eric Cantor said Monday that he opposes changing the law to allow fiscally pressed states to seek bankruptcy protection, an idea that has been raised by some conservatives.

Speaking to reporters, Cantor (R-Va.) also said state governments should not expect Washington to solve their fiscal problems. States have the ability to balance their books by cutting spending, raising taxes or renegotiating agreements with labor unions, he said. “There will not be a federal bailout of the states,” Cantor said.

With many states facing short-term budget problems as well as the heavy long-term burden of the costs of employee pensions and retiree health benefits, some policy analysts have suggested that states should be allowed to seek bankruptcy.

Currently, cities, companies and individuals are allowed to file for bankruptcy, a legal protection that temporarily frees them from fiscal obligations and allows them to restructure their debts. But law was never intended for state governments, many legal experts say.

The idea of giving states that option has been raised publicly by Republican former House speaker Newt Gingrich and other conservative thinkers who see it as a way to allow states to escape crushing debt with little damage to taxpayers.

There are a number of practical, and even Constitutional, problems with the idea of allowing states to file bankruptcy, not the least of them being that making such an event legally possible would potentially harm even solvent state by increasing borrowing costs (interests rates on government bonds are low now partly because borrowers know that states cannot file bankruptcy). There may be other solutions to the problems that states are facing, but bankruptcy isn’t one of them.

FILED UNDER: Deficit and Debt, Economics and Business, Quick Takes, US Politics
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010 and contributed a staggering 16,483 posts before his retirement in January 2020.

Comments

  1. tom p says:

    >>>the heavy long-term burden of the costs of employee pensions <<<

    the same pension funds they have been raiding (in Illinois at the least) so they could avoid raising taxes or cutting spending?

    I love how that particular truth is avoided with the phrase "long-term burden":

    "It's those greedy union state workers fault we are going broke!"

  2. sam says:

    “House Majority Leader Eric Cantor said Monday that he opposes changing the law to allow fiscally pressed states to seek bankruptcy protection, an idea that has been raised by some conservatives. …There are a number of practical, and even Constitutional, problems with the idea of allowing states to file bankruptcy”

    Uh, is there anything in the Constitution that prevents a state filing bankruptcy? The only provision I can think of that bears on the issue is the full faith and credit clause:

    Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State. And the Congress may by general Laws prescribe the Manner in which such Acts, Records and Proceedings shall be proved, and the Effect thereof.

    That, on its face, would indicate that if one state declares bankruptcy, all the other states would have to say, “Well, OK”. Now, Congress might be able to do something with regard to the “Effect thereof” part, but it’s not clear what.

    How do you read that, Doug?

  3. sam says:

    Ha! On second thought, maybe the government could prevent a state from declaring bankruptcy under the Commerce clause. But, but, wouldn’t that give conservatives heartburn? Wouldn’t that count as the ne plus ultra of federal power?

  4. IP727 says:

    sam says:
    Tuesday, January 25, 2011 at 10:06
    Ha! On second thought, maybe the government could prevent a state from declaring bankruptcy under the Commerce clause.

    The commerce clause regulates interstate commerce, not intrastate.
    The federal bankruptcy laws do not apply to states.
    Municipalities CAN declare bankruptcy however.

  5. sam says:

    “The commerce clause regulates interstate commerce, not intrastate.”

    The argument would be that a state declaring bankruptcy would affect the commerce among the several states and thus count as the predicate for federal regulation/action.

    “The federal bankruptcy laws do not apply to states.”

    Yeah. So what?

    Municipalities CAN declare bankruptcy however.

    Again, so what? How does that bear on the question of a state declaring bankruptcy?

  6. IP727 says:

    Again, so what? How does that bear on the question of a state declaring bankruptcy?
    sam

    Unless they pass their own bankruptcy law, they cannot use the federal statutes.to do so,
    that’s how it bears.

  7. john personna says:

    It is wrong and superficial to say that bankruptcy would necessarily increase borrowing costs.

    Orange County California went through bankruptcy, but in that process made good all bond obligations. They understood that they needed to do that, in order to ever borrow in the future.

    The interesting thing is contract and retirement obligations. The question which was actually being floated around Washington was whether bankruptcy could be used to break those obligations, while still paying those bonds.

    Now, I’m actually of two minds about this. I hold muni bonds, and would hate the short term hit a bankruptcy would bring, and some IMO small risk. But on the other hand, how do states fix over-commitments in contracts and benefits?

  8. john personna says:

    Heh, as a muni bond holder I guess I’m also OK with states paying more to borrow in the future. My bonds do roll over.

  9. sam says:

    “Unless they pass their own bankruptcy law, they cannot use the federal statutes.to do so,
    that’s how it bears.”

    Has a state said it would use the bankruptcy code? The code as regards political entities begins:

    An entity may be a debtor under chapter 9 of this title if and only if such entity-
    (1) is a municipality…

    Note the “under chapter 9” part. I’m arguing that a state declaring bankruptcy would be sui generis. Let’s substitute “repudiating its debts” for “declaring bankruptcy”. A state repudiating its debts, or attempting to do so, would fall outside the bankruptcy code. It would be an action unprecedented and not contemplated by the authors of the code. Such an an action would rely the notion of state sovereignty, I’d guess. But such action would fail, I believe, because it could be reached and thwarted by the federal government via the Commerce clause. All I’m saying is that states are not bound by the bankruptcy code, but that doesn’t mean a state would be successful in attempting to repudiate its debts.

  10. sam says:

    sorry about the goofy ital.