Should U.S. states be able to declare bankruptcy?

Lawmakers can't agree on whether giving struggling states access to bankruptcy courts will help, or make matters worse 

Federal Reserve Chairman Ben Bernanke may face Congressional hearings this month on the possibility of state-declared bankruptcy.
(Image credit: Getty)

With state governments facing massive, recession-stoked budget shortfalls, lawmakers in Washington are debating whether states, like cities, should be given a legal right to file for bankruptcy protection. Opponents of the plan say it would allow states to cut benefits for retirees living on on state pensions, and hurt investors who own state government bonds. But proponents say giving states "fair, orderly, predictable, and lawful" new options to overcome their financial problems might be the only way to avoid costly federal bailouts. Is this an idea whose time has come, or will it only deepen the nation's financial pain?

This will keep unions from bleeding states dry: "Faced with today's budget realities," says CNJ Online in an editorial, states need flexibility and ways to "lower costs in the short term as well as down the road." Bankruptcy protection could be "just such a tool," because it would allow states to "restructure" their debt. It would also give them "much more leverage" with unions representing government employees, so they could start cutting back on pensions they simply cannot afford to pay.

"Give states option to file for bankruptcy"

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This is an abdication of responsibility: The GOP is supposed to be "the pay-your-bills, personal-responsibility, sound-money party," says Joseph N. DiStefano in the Philadelphia Inquirer. But now Republican leaders — including former House Speaker Newt Gingrich and former Florida Gov. Jeb Bush — "have joined the 'Can't Pay? Don't Pay!' movement." There are too many people in default already — letting states back out of their obligations would unleash "America's Inner Deadbeat on a really big scale."

"States' defaulting on commitments as a GOP strategy?"

It would cause havoc — so it's not going to happen: "This is completely bonkers," says Felix Salmon at Reuters. "If states are allowed to file for bankruptcy, then Illinois, for one, would be shut out of credit markets." And if one state files, then many more states — New York included — would be seen as such bad credit risks that they, too, would be shut out, and unable to raise money by selling bonds. "That's not 'unlikely,' it's certain," which is why this idea of states repudiating their debts is so "unthinkable" it will never be allowed to happen.

"The metastasizing state-bankruptcy meme"

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