“Illinois is Better Off Bankrupt.” That’s the headline on a RealClear article last week by two economists.
It’s getting lots of attention based on our site meter. Bankruptcy-for-states, particularly Illinois, is certain to get more attention. In fact, we have it on good authority that discussion about it by the people who count will resume in earnest after November’s election.
So, for those unfamiliar with the concept, here are the basic background and links to earlier articles on it:
Bankruptcy-for-states would require federal legislation signed by the president. Currently, the United States Bankruptcy Code only authorizes government bankruptcy for municipalities in states that have allowed it.
Talk about it isn’t new. In fact, though it got little coverage, Governor Rauner spoke openly last year about his expectation that Congress should, and would, authorize it.
Debate about it, mostly behind the scenes, has focused heavily on two concepts. The first would give states the option of something resembling a full reorganization akin to Chapter 9 bankruptcy for municipalities or PROMESA, the special law passed for Puerto Rico, in which all debt would be subject to adjustment.
The second alternative is narrower and would address pensions only, along the lines of what the Manhattan Institute has proposed. See their article on it linked here. We’ve called it “Bankruptcy Lite.” It would give states the option to use a limited form of bankruptcy under which just pensions could be reformed. Our discussion of the two options is linked here.
Our sources now indicate that when talks resume the focus will be on the second alternative. That’s because the broader, first alternative would hurt bondholders, making support in both the House and Senate unlikely, both being majority Republican for now.
However, If Democrats retake the House in November’s election, as many now predict, prospects for the second alternative would probably be impaired because Democrats would be more protective of pensions.
My earlier primer on bankruptcy-for-states is linked here, and addresses the legal issue whether Congress could authorize it.
Whether Congress should authorize it is discussed in my article linked here.
“The case for allowing states to declare bankruptcy is also made in a Bloomberg article linked here.
Our view at Wirepoints remains that debate should commence – yesterday. Using the federal bankruptcy power to offer a reorganization option to Illinois and other deeply trouble states is inevitable and unavoidable, however undesirable it may be. Exactly what form it should take remains to be determined.
–Mark Glennon is founder and Executive Editor of Wirepoints.