From Sacramento to Albany, state governments, whipsawed by financial calamities from falling tax revenue to rising pension costs, are grappling with multibillion-dollar deficits and yawning budget gaps. An air of crisis hangs over the states. Ratings agencies warn of downgrades. Bondholders fret over possible default. State officials, legislators and interest groups of all kinds debate what is necessary to salvage finances: spending cuts, layoffs and, yes, even tax increases.
Into this uncertain and volatile mix, add a once-unthinkable word when it came to states: "bankruptcy."
Led by Republicans Newt Gingrich and Jeb Bush, the call for legislation empowering states to declare bankruptcy and restructure debts and obligations is gaining volume, if not necessarily resonance. The debate over state insolvency rages, at least in policy circles. Talk, however, usually centers on what bankruptcy might accomplish: pare back public pensions, renegotiate union contracts, slash debt and deficits.
But the legal complexities and constitutional ambiguities inherent in such a law are rarely discussed. Neither are actual mechanisms for implementation. That's understandable. It's messy. State bankruptcy cuts to the heart of a federalist system, with fractured political powers, bifurcated courts and uncertain hierarchies. Can states legally go bankrupt? The question looks simple, the answer anything but. "It's a very close call," says Richard Levin, one of the drafters of the modern U.S. Bankruptcy Code in the '70s and now head of restructuring at Cravath, Swaine & Moore LLP. Levin quickly adds that constitutional considerations are only part of the equation: "Simply because Congress may do something doesn't mean it should."
READ MORE HERE