Bankruptcy Coming Soon to a State Near You

When the clueless New York Times, fishwrapper of record, notices something, you can rest assured that, after you extract the political spin, they are merely restating the obvious, and so it is today:

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.

I have been raising the issue of state bankruptcy on this blog for years, go here  and here to read two of my posts on the subject, and that process will be starting soon, probably in the aftermath of a state being unable to make payroll to state employees.  When it does happen, I guarantee that the Land of Lincoln will be first in line.  State governments have sown the wind with ludicrous spending for decades in many states and the whirlwind is rapidly forming.

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Donald R. McClarey

Cradle Catholic. Active in the pro-life movement since 1973. Father of three and happily married for 35 years. Small town lawyer and amateur historian. Former president of the board of directors of the local crisis pregnancy center for a decade.


  1. Actually, methinks someone is attempting to float a trial balloon that is likely to be shot down. Note the nearly complete lack of attribution in the story — not to mention it’s so vague (what “policy makers” are they talking about?) that any journalism instructor worth his or her salt would give it a failing grade or insist it be rewritten.

    Is it possible that this story might also have been leaked or planted in an attempt to manipulate bond markets?

    As bad as giant budget deficits are, a formal “state bankruptcy” proceeding would mean in effect surrendering state sovereignty and control of state finances over to the federal court system — and that would be a cure far worse than the disease. It would raise gigantic constitutional issues that would take decades to resolve.

  2. It’s certainly possible that it is a trial balloon Elaine, and I agree with you that bankruptcy raises big constitutional issues. However I think it is coming. Some states, Illinois and California, have gotten themselves into such a fiscal mess that they are in de facto bankruptcy already. De jure bankruptcy will follow when a state can no longer muster the resources to continue basic state services. I think Illinois will reach that point sooner rather than later.

  3. According to current projections per the Center on Budget and Policy Priorities, these are the states with the worst proportionate revenue shortfalls, rank ordered:

    New Jersey

    Nevada has had the most wretched real estate crash in the country and suffers 14% unemployment. The situation in California has been much the same, with the addition of an appalling legislature. Texas is a puzzle, however, given its general prosperity.

  4. “Texas is a puzzle, however, given its general prosperity.”

    Texas has a two-year budget cycle. Their last budget (2009-10) was probably based on revenue projections and receipts made before the worst of the recession hit, and during the oil price spike in 2008. Only now (and convieniently, only after Gov. Perry got reelected) has the recessionary decline in revenues become evident. Note also that only 20 percent of their state workforce is unionized, so public employee unions aren’t the culprit there.

    I’m kind of surprised to see Minnesota on the list also, given that it has a reputation for extremely “clean” government, and (to my knowledge) is not renowned for having a high number of unionized employees or persons dependent on expensive social programs either.

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