The Constitutional Law of State Debt

Abstract

State debt crises are an underappreciated driving force in American constitutional history. This article, which is being published as part of the Duke Journal of Constitutional Law & Public Policy’s symposium on “The Consequences and Constitutional Dilemmas of State Debt,” assesses the financial challenges facing the states, the different ways in which those challenges might be addressed, and constitutional issues that those responses might raise. We consider five different kinds of scenarios:

1. Payment delays and IOUs: States may simply seek to delay repayment of their obligations without attempting to diminish their ultimate liability, or they may resort — as California and Illinois already have — to paying private businesses, local governments, and others with short-term IOUs rather than real money. To the extent that they alter the payment terms of state contracts, these short-term expedients may raise issues under the Contracts and Takings Clauses. But the short time frames involved make litigation unlikely.

2. Alterations to Long-Term Obligations: States in economic distress may decide to alter the terms of long-term agreements with current and former employees to provide pensions and healthcare benefits. Such alterations would raise more substantial Contracts Clause issues, although state sovereign immunity may severely constrain private parties’ remedial options.

3. Bailout: The national government may seek to “bail out” a financially troubled state, much like the International Monetary Fund might bail out a sovereign debtor or a distressed debt lender might lend on an emergency basis to a cash-strapped business. If a bailout occurs, the interesting questions concern what concessions the national government might extract in order to minimize the prospect of recurrence, as well as what long-term effects a bailout might have on the financial independence of the states.

4. Default: If states fail to pay principal or interest when due with no clear plan of when, if ever, it will be paid, that may well violate the Contracts Clause. The interesting issues will concern sovereign immunity and remedies, including the possibility that Congress may seek to abrogate the states’ immunity or induce immunity waivers.

5. Bankruptcy: Though not currently an option for states, scholars and politicians have suggested a voluntary bankruptcy regime for states, and one of our fellow symposium contributors argues for a mandatory regime. We doubt that a mandatory regime would be constitutional, and we suggest some important reservations about a permissive regime as well.

We do not purport to definitively resolve most of these issues. Our more modest purpose is to flag the constitutional considerations that may arise and suggest useful ways to think about them. Hopefully our roadmap will assist those scholars, lawyers, and policymakers who must pick their way through this maze.

Keywords: state debt, contracts clause, state sovereign immunity