Senate leaders eye option of state bankruptcy

01-26-2011 • Reuters.com

Senate Republican leaders said on Tuesday they were considering introducing legislation to allow financially stressed U.S. states to declare bankruptcy, even though the No. 2 Republican in the House of Representatives has rebuffed the idea. "We're exploring that as a responsible option," Senator John Cornyn, who sits on both the Budget and Finance committees, told reporters. Some Republicans have embraced the bankruptcy option, which would allow states to sort out finances and renegotiate contracts with public employee unions, as an alternative to sending in federal aid. Pension obligations to state workers including teachers and law enforcement personnel pose a major burden on many states. But analysts -- and states themselves -- are concerned that opening up a bankruptcy option would spook the buyers of state debt, driving up interest rates and making borrowing more expensive. Washington Governor Chris Gregoire and Nebraska Governor Dave Heineman said in a joint statement on Tuesday that states would not use bankruptcy as a budget solution. "The mere existence of a law allowing states to declare bankruptcy only serves to increase interest rates, raise the costs of state government and create more volatility in financial markets," they said.