Will states be allowed to declare bankruptcy?

Ever since it's become apparent that states such as California and Illinois have such crushing debt burdens their state entire government could realistically collapse, their have been a lot of rumblings about creating a bankruptcy process for the states. The alternative is a federal bailout, and that would be a tough sell asking taxpayers to cough up money to pay for corruption and mismangement in better-run states.

Today, the New York Times reports that a state bankruptcy process is being seriously explored by Congressional Republicans:

For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.

Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

The fine folks at AFSCME are probably scared witless right now, and that's a good thing.

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