Bankruptcy Law for States Could Carry Risk, Bring Opportunity

By Bumsted, Brad | Tribune-Review/Pittsburgh Tribune-Review, February 14, 2011 | Go to article overview

Bankruptcy Law for States Could Carry Risk, Bring Opportunity


Bumsted, Brad, Tribune-Review/Pittsburgh Tribune-Review


HARRISBURG -- The notion that deficit-strapped states should be able to declare bankruptcy, as some members of Congress and a national taxpayers group believe, is "really stupid," says Miriam Fox, a Democratic staffer for the Pennsylvania House Appropriations Committee.

"It would ruin your credit rating," Fox said.

But proponents including Americans for Tax Reform say bankruptcy could be a way to wipe out state debt overnight, wrest concessions from public employee unions and deal with longtime obligations for pensions and health care.

States are not permitted to seek bankruptcy protection in federal courts. Corporations file for bankruptcy, as do some municipalities. Last year, 1.5 million Americans filed. Some members of Congress are considering a law to allow states to file for bankruptcy. House Judiciary Chairman Lamar Smith, R-Texas, plans to hold a hearing this month on the matter.

Such a change is needed "so governments can say to public employee unions, 'If you're not prepared to make a reasonable deal, a judge will make a reasonable deal,'" former House Speaker Newt Gingrich told the Tribune-Review.

Gingrich, a potential Republican presidential candidate, disputes the notion that bankruptcy would ruin a state's credit rating and prevent it from securing loans. He cites the recovery of Orange County, Calif., four years after it filed for bankruptcy in 1994.

The fact Congress is considering legislation "serves notice on states: 'Don't come to Washington for a bailout,' " Gingrich said.

Combined, states' deficits next fiscal year will reach a projected $125 billion, says Iris Lav of the Washington-based Center on Budget and Policy Priorities. And those states haven't banked enough money to cover pensions coming due. Estimates for the collective pension shortfall range from $500 billion to $3 trillion.

Pennsylvania's deficit is estimated at $4 billion for the budget year beginning July 1.

State lawmakers say no one in the General Assembly is talking about advocating for the right to file bankruptcy -- and it's not likely to happen.

However, Rep. Scott Perry, R-York County, said it shouldn't be ruled out.

"When you have a significant crisis, you have to look at all the options," Perry said.

A bankruptcy option for states "sounds like a good option, particularly if you can rein in the out-of-control costs from unionized employee pensions, health care and salaries," said Matthew Brouillette, president of the Commonwealth Foundation in Harrisburg.

"But it couldn't functionally work in the same way that it does for businesses or individuals," Brouillette said. …

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