A Minimalist Approach to State 'Bankruptcy'
32 Pages Posted: 14 Apr 2011 Last revised: 28 Dec 2014
Date Written: December 12, 2011
Increasingly finding themselves in financial straitjackets, states have been turning to austerity measures, tax increases, privatization of services, and renegotiation of collective bargaining agreements. Absent a federal government bailout, however, states will also need debt relief if their debt burden becomes so crushing that reasonable efforts at fiscal reform will fail to avoid default. Some advocate providing this relief by, effectively, extending municipal bankruptcy law to states. That approach brings in excess baggage, however, engendering political opposition and constitutional concerns. There is a simpler solution: Enable states to work out their debt problems with their creditors. Although the main obstacle to a consensual debt restructuring is likely to be the creditor-holdout problem, this Article proposes a minimalist legal framework incorporating certain limited bankruptcy protections that would not only help states solve that problem, but would also can help address the political and constitutional concerns. The proposed minimalist framework also would enable a state to obtain needed liquidity during the debt-restructuring process. Although the federal government could provide this liquidity, the proposed framework would enable the liquidity source to be privatized.
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