'No Thanks,' States Say to Bankruptcy Idea


California Treasurer Bill Lockyer did not mince words Monday (January 24) when he addressed a federal proposal that would let states declare bankruptcy.

"It's a cynical proposal intended to incite a panicked response to a phony crisis," Lockyer, a Democrat, said during a conference call with reporters organized by the Economic Policy Institute, a Washington, D.C., think tank. "Killer bees, space aliens ... now it's the invasion of the bankrupt states. The truth is, no state wants to declare bankruptcy, no state needs to declare bankruptcy, and no state would."

The proposal at issue would give states the option of declaring bankruptcy in much the same way that businesses can, though it is unclear whether courts would go along with such a move because states, unlike the private sector, are considered sovereign entities. The idea has gained attention in recent weeks after former Republican House Speaker Newt Gingrich lent his backing to it, and it is aimed at avoiding future federal bailouts of the states, given their well-documented fiscal problems.

The proposal, however, is so controversial that it has only been discussed behind closed doors on Capitol Hill, has not yet been introduced in the form of a bill and has no known congressional sponsors, according to The New York Times . Lockyer acknowledged Monday that he has not seen a word of it.  

That hasn't stopped a preemptive assault from state officials. While Gingrich and others argue that bankruptcy would provide the most fiscally stressed states with a new form of relief, state officials around the country believe it would do far more harm than good.  

Among their worries is the potentially devastating effect a state bankruptcy declaration could have on the already jittery municipal bond market, potentially unnerving investors and threatening tens of billions of dollars that states need to borrow for infrastructure and other major capital projects.  

"Just the availability of a bankruptcy option and the potential bond default could severely damage state credit ratings and destroy the trust of bondholders," Democratic New York Comptroller Thomas DiNapoli told Reuters

" 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, " the co-chairs of the National Governors Association, Washington Democrat Chris Gregoire and Nebraska Republican Dave Heineman, said in a joint statement.

Public employee unions and their political supporters also abhor the idea. States that file for bankruptcy could shed some of their financial obligations, possibly including deals they previously negotiated with public workers. That could include pension and retiree health care obligations that states are far behind in paying, potentially leaving tens of thousands of public sector retirees without benefits they were promised.  

A spokesman for Texas Governor Rick Perry, a Republican, compared the bankruptcy idea itself to a federal bailout, and said Washington instead should take a cue from the states when it comes to balancing a budget. Every state but Vermont is legally bound to balance its budget, which they have done during tough times by cutting spending, raising taxes or both.  

"Bankruptcy should not be a bailout for states that have been poorly managed," Perry's spokesman said . "Families across America have to live within their means, and state and federal government need to do the same."

Meanwhile, one key member of Congress also spoke out against the bankruptcy plan on Monday, strongly diminishing its chances of success. House Majority Leader Eric Cantor, a Virginia Republican, said states already have all "the requisite tools" they need to deal with their financial problems, according to The Wall Street Journal .


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