Way Out for Struggling States: Bankruptcy?

Idea kept under wraps over market fears
By Matt Cantor,  Newser User
Posted Jan 21, 2011 10:50 AM CST
Sen. John Cornyn, R-Texas, has raised the question of bankruptcy for states.   (AP Photo/Charles Dharapak, File)
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(Newser) – As cash-strapped states scrabble to fix budgets and pay public workers’ pensions, some lawmakers are pointing to bankruptcy as a solution, the New York Times reports. States can't go that route currently because they're technically sovereign entities, but backers say it's a better alternative to what the Times terms "no-strings bailouts." So far, they’re keeping the idea quiet for fear of rattling the municipal bond market.

Investors in a state's bonds aren't the only potential losers: Bankruptcy would offer states the opportunity to change its contractual obligations to public employees, and even just the possibility of such a move could give states a negotiating edge. Worries a top union leader, "They are readying a massive assault on us." Despite interest in the idea from lawmakers on both sides of the aisle, it would be tough to get a bill passed because of constitutional restraints and market concerns, the Times notes. Instead, some kind of oversight panel to help states might be the answer.

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