State Bankruptcy Concept May Be Losing Steam

   By Andrew Thomason - (ISN) - 1/30/2011 - Should states be allowed to declare bankruptcy much the way businesses can?
   It’s an idea that’s been floating around Washington, D.C., lately as more states find themselves in financial holes.
   In several reports by national media, Illinois has been used as an example of a state that could use a bankruptcy option because of its billions-dollar deficit.
   But there are constitutional hurdles that would be hard to overcome, according to Douglas Baird, a law professor at the University of Illinois at Chicago.
    “A state may contract debt but, typically speaking, you can’t go to an Illinois court and sue the state of Illinois to collect the debt and you can’t go to federal court to sue a state and collect the debt because states have what’s called sovereign immunity,” Baird said.
   Bankruptcy affords individuals and businesses a way to get out from under the debt they owe and, in some cases, reorganize that debt to remain in business. States don’t need that option because of  sovereign immunity, Baird said.
   “If you’re immune from suit, then you don’t need bankruptcy because your creditors can jump up and down but they’re not going to be able to do anything because they can’t seize your assets or do stuff like that anyway,” he said.
   This immunity makes bankruptcy for states unnecessary, according to opponents of the plan.
   At least one constitutional officer in Illinois has come out against any bankruptcy plan for states. Republican Treasurer Dan Rutherford, speaking on CNBC Tuesday morning, said that states need to deal with their fiscal issues through channels already available.
   States can either raise taxes, like Illinois did recently when it increased its personal and corporate income tax rates, default, or make major cuts, Rutherford said on the broadcast. He said states facing fiscal problems must use some combination of the options available to fix the problems.
   Democratic Gov. Pat Quinn’s budget point man David Vaught, agreed, saying letting states go bankrupt is a “very, very bad idea.”
   “States don’t go bankrupt. There’s no Chapter 9 in the current bankruptcy law (for states)”, Vaught said, referring to the federal bankruptcy code that allows municipalities to reorganize debt with creditors.
   “States are sovereign states,” Vaught said. “They have unlimited taxing power. They have the ability to solve their own problems, and we don’t need this debate in Washington,” Vaught said.
   The idea of giving states bankruptcy as an avenue to deal with mounting deficits garnered attention after being mentioned by former Republican House Speaker Newt Gingrich. Many are concerned Gingrich’s plan would allow Illinois and others to change pension benefits and other services promised by the states.
   Bankruptcy is “essentially creating an avenue for states to walk away from their obligations to provide public services, to pay their bills, and to meet their commitments to their employees. That’s a dangerous recipe,”  said Anders Lindall, a spokesman for the American Federation of State, County and Municipal Employees Council 31.
   Prominent political leaders on both sides of the aisle have since come out against the plan. It seems to be losing steam and specific legislation has yet to be introduced in Congress.
   Note: Originally published on Jan. 26, 2011. Story courtesy of Illinois Statehouse News.