Some Support Letting States Go Bankrupt

by Wesley Fox Illinois along with California have massive budget shortfalls in 2011.  In order to help states deal with budget crises, University of Pennsylvania Law Professor David Skeel argues states should be able to go into bankruptcy.  Local governments have been able to declare bankruptcy in order to settle debts since the 1930s, but states have...

by Wesley Fox

Illinois along with California have massive budget shortfalls in 2011.  In order to help states deal with budget crises, University of Pennsylvania Law Professor David Skeel argues states should be able to go into bankruptcy.  Local governments have been able to declare bankruptcy in order to settle debts since the 1930s, but states have never had the option.

In his article in The Weekly Standard, Skeel writes:

There is little evidence that either state (California or Illinois) has a recipe for bringing down its runaway expenses, a large portion of which are wages and benefits owed to public employees. This means we can expect a major push for federal funds to prop up insolvent state governments in 2011, unless some miraculous alternative emerges to save the day. This is where bankruptcy comes in.

According to Michael Barone in the National Review Online, it would strengthen governors and legislatures in their negotiations with public employee unions, pushing them to accept cuts or “face a more dire fate in bankruptcy court.”

The Institute’s Budget Solutions 2011 offers another way, showing that a federal bailout is not necessary for Illinois if state government is willing to make the appropriate spending realignments, address labor costs, and enact pension funding reform.  Check it out.