Struggling States Refuse Bankruptcy Bill

A number of U.S. states currently struggling with large budget deficits refused the offer of federal help by means of legislation that would allow them to declare bankruptcy, Reuters reported this week.

The bill would eliminate current laws requiring states (except Vermont), which are considered sovereign entities, to finish every fiscal year with balanced sheets. They would therefore be able to file for bankruptcy and get help and protection from the government.

The legislation may be introduced in Congress in about a month, according to former House speaker Newt Gingrich, an active supporter and representative of the Republican party.

Among the states are California, Illinois, and New York, who issued a large portion of the municipal bonds currently valued at $2.8 trillion. According to California State Treasurer Bill Lockyer, bankruptcy would hinder the states from recovering from the recession through infrastructure investments.

Lockyer called the plan a “wrecking ball” on the economy and the public, saying the state had the means to fix their own problems. California is currently reducing employee benefits and hiking up contributions, along with other similar measures.

In Texas, a representative for Governor Rick Perry said that Washington must respect that the state’s leaders and legislators are practicing fiscal responsibility. Instead of offering a bailout in the form of bankruptcy, he said, governments have to “live within their means,” as American consumers do.

Thomas DiNapoli, State Comptroller for New York, said that a bankruptcy option could damage a state’s credit record and turn away bondholders. He added that the economy does not need another blow to its confidence, but rather an organization of its revenue and spending.

 

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