Posted on Jan 25, 2016

The Case for Allowing U.S. States to Declare Bankruptcy

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Puerto Rico is trapped in a financial crisis so deep that President Obama says the only way out for the territory is to make it eligible for a bankruptcy-like process to shed some of its debts. None of the 50 states is nearly as bad off as Puerto Rico. But some influential people are arguing that if a state does get into deep financial trouble, some kind of bankruptcy would be the best option—certainly better than a taxpayer bailout.

States, unlike cities and counties, currently can’t declare bankruptcy. The case for allowing it is that a well-run proceeding apportions losses fairly and fast. Lenders and bondholders absorb some of the pain, but so do government workers and retirees. Taxes go up and government services are cut back, but ideally not as severely as in an uncontrolled default. The result is a government that’s streamlined, not gutted.

The Case for Allowing U.S. States to Declare Bankruptcy

Posted from bloomberg.com

Posted in these groups: Preventing bankruptcy tips 2

Bankruptcy

Posted 9 y ago

Responses: 5

CPT Jack Durish

Posted 9 y ago

I'm going to respond to the lead question rather than the issue of bankruptcy for a territory, Puerto Rico. Should a state be allowed to declare bankruptcy? Yes, but... (And there's a big "but") If a state is bankrupt, it is bankrupt. Its creditors have to accept a portion of the responsibility. They extended credit to a bad risk. They entered into contracts which they should have had no expectation for profiting from (especially public service unions that negotiated wages and benefits far beyond the actual worth of state employees). Now, for that "but"... Any state that seeks legal protection in bankruptcy should lose its statehood. Its citizens have proven themselves incapable of managing the affairs of a state. The state should revert to territorial status with a governor appointed by the federal government. Yes, I know that our federal government is equally guilty of the same mismanagement and excesses that are leading our states into bankruptcy, but its assets are so much more vast that we have a long way for the US to go to reach bankruptcy (wherein liabilities exceed assets).

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CPT Jack Durish

9 y

MSgt (Join to see) - You make a damn good argument. States today receive more of their revenue from the federal government than they do from their own taxpayers. (Granted, the federal money is redistributed back to the state after being taken from taxpayers in that state through federal taxes, or that's what they'd have us believe) Thus, states are more likely to follow the wishes of the feds than their own citizens (follow the money). Still, they don't have to take the money. If the feds are leading them into bankruptcy, shouldn't our state leaders have the good sense to say "No"?

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MSgt (Join to see)

9 y

CPT Jack Durish - Good point as well. State leaders could say no, but they would pay for it in the media and election day. Many interest groups, including government agencies, NGOs and community activists would make state leaders feel the pain, esp. in the ratings hungry media. I truly believe many of these problems would be resolved or mitigated if a HUGE tax law overhaul took place. That would need to include a more expansive sales tax and a lowering, dismantling of the income tax. I would gladly pay more in sales tax if that was the main (in conjunction with property tax), or only tax. That is because everyone would be participating in the tax system and more revenue might actually be taking in by the local/state governments. That might also help alleviate the government assistance/welfare system because it may not seem so attractive any more to the unwilling, but able, and services could be enhanced to those truly in need.

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MAJ (Join to see)

9 y

CPT Jack Durish I like it but can't view the old comments. First thing that needs to be gone in a bankrupt state are the pensions of all previous elected officials!

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Sgt Aaron Kennedy, MS

9 y

"The state should revert to territorial status with a governor appointed by the federal government." I like this. I would use the "with the advice and consent of the Senate" clause in there as well. Appointed by the President, Confirmed by the Senate. If we're going to grant that level of Power, let's make sure there's a "check & balance" of some type.

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