As more states fall into a budgetary quagmire, many Americans have started to talk about the idea of states filing bankruptcy. Individuals can do it; companies can too. Even municipalities have the ability to file bankruptcy under Chapter 9 of the US Bankruptcy Code, so why not states?
A recent survey by the Turnaround Management Association (TMA) found that most turnaround professionals – lawyers, accountants and the like – don’t think states should be able to file for bankruptcy. Nearly 70% of respondents think struggling states need to look beyond bankruptcy for an alternative solution to solve fiscal problems aggravated by the recent recession.
But 32% of respondents are in favor of enacting a U.S. bankruptcy law for states, arguing that it would deftly address onerous union contracts and debt levels and drown out any pleas for federal bailouts.
Keep in mind that a number of US corporations have filed bankruptcy to get out from under so-called “legacy issues” such as union contracts and costly pension plans. Many of them have emerged from bankruptcy as stronger companies without those legacy issues. Of course, critics point out that employees lost their pensions in the process.
When it comes to state bankruptcies, TMA President Mark Indelicato, a managing partner with Hahn & Hessen LLP in New York, says allowing states to file bankruptcy to eliminate similar legacy issues will just shift the burden of these liabilities from the states to the federal government without ever addressing the underlying problems.
I confess, I am conflicted about the idea of states filing bankruptcy. I can’t help but think of California, teetering on the edge of… something not good. Talk about legacy issues – the state is bogged down with them, and one of the biggest is Proposition 13. But California certainly isn’t alone in its fiscal failures – many states are in bad shape.
On one hand, I don’t feel good about letting big pieces of our nation spin into a financial abyss, dragging down companies and individuals. On the other hand, I don’t really like paying for other people’s decisions (or mistakes, if you will).
And, I can’t forget that state bankruptcies would have a significant impact on the commercial real estate world. Filing bankruptcy would allow states to disavow leases that they deem unnecessary or unfavorable. That could end up hurting a lot of property owners, both large and small.
So, what do you think – should states be allowed to file bankruptcy?
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