With tax revenue crashing and expenditures soaring, states face severe financial problems. Illinois has already requested a federal bailout of its pension system, and last month Senate Majority Leader Mitch McConnell suggested that Congress should enact legislation allowing states to go bankrupt, according to a Wall Street Journal commentary. Allowing states to declare bankruptcy would fundamentally contradict the federal structure of our constitution, according to the commentary. Federal bankruptcy protection would greatly constrain a state’s sovereignty, or power to govern itself, which the Constitution guarantees. Fortunately, there is a better path for cash-strapped states: more borrowing. States can put investors at ease by waiving their claim to sovereign immunity in the contract under which the bonds are issued, according to the commentary. States routinely give such waivers, and courts enforce them. They can agree that the contract under which the bonds are issued will be subject to the law of another jurisdiction and that they themselves may be sued in courts of that jurisdiction. This helps attract investors, because just as creditors generally don’t trust a court in a country with poor credit to enforce the terms of a bond contract against that country, according to the commentary. States could also reduce the interest rates they would otherwise pay by providing bondholders with credit enhancements. Read more. (Subscription required.)
*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.