Chapter 8: Here Comes Da Judge... the State Bankruptcy Judge

UPenn Law Professor David Skeel Queries the Wisdom of a Bankrutpcy Provision for Overburdened States....

 ...And So Does Sarah Palin

Anyone who proposed even a decade ago that a state should be permitted to file for bankruptcy would have been dismissed as crazy. But times have changed. As Arnold Schwarze-negger’s plea for $7 billion of federal assistance for California earlier this year made clear, the states are the next frontier in “too big to fail.” In the topsy-turvy world we now inhabit, letting states file for bankruptcy to shed some of their obligations could save American taxpayers a great deal of money..... click here for entire article.

http://www.weeklystandard.com/articles/give-states-way-go-bankrupt_518378.html

Unlike Chapter 9 which applies to Cities and Municipalities there has been virtually no discussion on Wall Street, Main Street or the blogosphere about what should happen in the event of defaults by cash strapped states who are over-burdened with unfunded pension liabilities, unaffordable union contracts and enormous deficits and unsupportable bonds, lower floaters et al.
 
Just google State Bankruptcy or any variation thereon and very little useful pops up save an interesting article done in the Nation bu a Upenn law professor who posits the hypothetical advantages of insituting a Chapter 8 (for State Bankruptcy).  Chapter 9 looks like it will have its share of busted municipalites and a fairly starightforward if arcane process.  But state don't become insolvent like municipalities who typically incur debt  for a different spectrum of undertakings.
Professor Skeel evaluates the constitutionality of putting in place a new provision under the Federal Bankruptcy Code-- say Chapter 8-- the rest are pretty well taken already.  The only constitutional roadblock  is that there could be no involuntary filings by creditors whcih is actually quite alright in his opinion. The mere chimera or spector  of a state actually having a mechanism to renegotiate health care and insurance costs, pension benefits (say 80 cents on the dollar), general obligation bonds (say 25 cents on the dollar) and union contracts and work rules.  Pretty nifty.  Chapter 11 gives the debtor in possession the exclusive period to comeup with a plan of reorganization.  A Chapter 8 would create a path( i.e. forcing parties to the table)  similar to GM analagous to pre-packaged bankruptcy-- once you have eveyones attention.  In and out in 30 days.  Once this legacy  crap has been disaffirmed the states could again  re-enter the bond market albeit at higher pricing which would further impose discipline on the otherwise incontinent.
As Maslow siad when your only tool is a hammer, every problem starts looking like a nail.  Skeel may have nailed this one.

Comments

[Rueese]

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