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IPFS News Link • Government Debt & Financing

First GM, now states? Pros and cons of bankruptcy

Big companies such as General Motors file for bankruptcy. Some cities do, too. And, last year, 1.5 million Americans did it. But U.S. states aren't allowed. Now, a few policy makers and pundits are debating whether it's time to give states a court-sanctioned way to shed their debts. The idea galls critics. "Baloney" is what California Treasurer Bill Lockyer calls it, saying his state, which is already weighing painful tax hikes and spending cuts, doesn't need the option. It seems clear that some states can't afford their long-term promises to pay for pensions and retiree health care. Those swelling costs could force states to raise taxes and slash services like public transportation. But is bankruptcy the right solution? In Bankruptcy Court, a judge could force lenders and public workers to accept less than they are owed. Debt could drop overnight. Existing union contracts could be replaced with cheaper ones. In theory, states could regain their financial health. But the risks are high. A state could be tied up in court for years as various sides squabble over a deal that might bring only scant relief in the end. Even discussing the idea could spook investors and rattle states' fragile finances. States need investors to buy their bonds, and demand already was dropping before talk of a bankruptcy option spread.