The U.S. State Bankruptcy Dilemma: Consequences, Possibilities, and Controversies

On April 21, Senator Mitch McConnell expressed his support for allowing states to declare bankruptcy. This idea has sparked heated debates about the potential consequences and the feasibility of such legislation. If U.S. states were to go bankrupt, it would constitute a significant and multifaceted crisis. This article explores the implications, legal challenges, and potential outcomes of this scenario.

Consequences of State Bankruptcy

The consequences of state bankruptcy would be severe and far-reaching. First and foremost, no financial institution would be willing to loan money to these states. This would immediately impair the ability of states to fund essential public services and infrastructure. Bond issuances for improvements in schools, state colleges, municipal buildings, roadways, and bridges would cease entirely.

Imagine if municipal water, sewage treatment, and garbage collection systems were to stop functioning. Would you be willing to accept that devastation? Additionally, the police force might have to take massive pay cuts or reduce the number of officers on payroll. Fire departments might be disbanded due to a lack of funding. In a word, no money means no services, and state money is crucial for supporting local municipalities.

So, why do I believe that Kentucky might be the first state to declare bankruptcy? Can we picture Kentucky as the first domino to fall? The reasons behind this assumption are multifaceted and rooted in the state’s economic history and political climate, which will be discussed in further detail later in this article.

Legal Framework and Federal Involvement

Currently, there is no federal law that would enable a state to declare bankruptcy. This process would require a new federal statute, which would define the parameters of such a declaration. In a typical reorganization or bankruptcy, a disinterested third party, often a trustee or equivalent, has broad powers to disavow certain debts, compromise others, and ratify specific obligations.

Should a federal law be enacted, it would detail which financial obligations could be discharged and which must remain. For instance, pension obligations might be considered sacrosanct, while commercial creditors could be subject to more stringent scrutiny. The most contentious issues would likely revolve around employee handbook obligations and union contracts. Could states, for example, opt to disavow obligations to their state police? This remains a significant question, as state police play a crucial role in law enforcement and public safety.

Senator McConnell’s point is that some states may have foolishly entered into contracts and other obligations that have become an unfair burden on taxpayers. However, the reality is that the debt of U.S. states has been viewed as sovereign debt dating back to the early 19th century. In cases where several states had to repudiate state-issued bonds, the usual retaliatory measures against sovereign states did not work effectively.

Retaliatory Measures and Practical Challenges

Dealing with the fallout of state bankruptcy poses unique challenges. Internal trade within the United States, facilitated by cross-state movement, would make any form of trade ban impossible without also interrupting trade with non-defaulting states. Similarly, the lack of state currencies and the principle of sovereign immunity would prevent the use of economic sanctions or direct legal action against errant states.

In conclusion, the idea of state bankruptcy is not merely a theoretical concept. It has significant economic, social, and legal implications that would reverberate throughout the entire country. The passage of a federal law to enable state bankruptcy would be a monumental shift in the financial landscape of the United States, and it would require careful consideration of the practical and ethical challenges involved.

While the prospect of state bankruptcy is a daunting one, understanding its potential consequences and the legal frameworks required to address it is crucial for policymakers and the public alike.