No bankruptcy option for states, Cantor says

By Michael A. Fletcher
Tuesday, January 25, 2011

House Majority Leader Eric Cantor said Monday that he opposes changing the law to allow fiscally pressed states to seek bankruptcy protection, an idea that has been raised by some conservatives.

Speaking to reporters, Cantor (R-Va.) also said state governments should not expect Washington to solve their fiscal problems. States have the ability to balance their books by cutting spending, raising taxes or renegotiating agreements with labor unions, he said. "There will not be a federal bailout of the states," Cantor said.

With many states facing short-term budget problems as well as the heavy long-term burden of the costs of employee pensions and retiree health benefits, some policy analysts have suggested that states should be allowed to seek bankruptcy.

Currently, cities, companies and individuals are allowed to file for bankruptcy, a legal protection that temporarily frees them from fiscal obligations and allows them to restructure their debts. But law was never intended for state governments, many legal experts say.

The idea of giving states that option has been raised publicly by Republican former House speaker Newt Gingrich and other conservative thinkers who see it as a way to allow states to escape crushing debt with little damage to taxpayers.

But the proposal has generated controversy. Some analysts say the move would wreak havoc on the municipal bond markets, long viewed as a safe investment haven where ordinary Americans can buy bonds without having to worry about a state government default.

States would have a harder time raising money if it were possible they could file for bankruptcy. The most indebted states could be shut out completely from the bond markets, which provide them the financing to pay for infrastructure projects and, in some cases, current expenses. Right now, because state governments cannot file for bankruptcy, they can borrow money at very low rates.

The suggestion also has drawn fierce opposition from public employee unions, who say states could use the bankruptcy process to gut their members' pension and health-care benefits.

During the depths of the recession, Congress pumped about $165 billion in emergency aid into the coffers of state governments. Still, many states have had to make deep cuts even as more people were relying on them for health care and other social service help.

The Center on Budget and Policy Priorities on Friday said that 44 states and the District are projecting budget shortfalls totalling $125 billion for the upcoming fiscal year, which in most states begins in July.

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