“Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
This raises so many more questions than it answers:
Why should anyone lend money to States again?
Should state employees be induced to take less salary in exchange for greater benefits , especially pension and retirement plans?
How will Unions negotiate with States and CIties going forward? Is it now all about cash upfront, with future promises/incentives looked at as meaningless ?
I expect the repercussions of this are far exceeded by the States’ fiscal condition.