A Little Color On State Bankruptcy Procedures
Posted By thestatedtruth.com on March 11, 2010
From Art Cashin on the floor of the New York Stock Exchange………A little color on state bankruptcy procedures. Â
California And Bankruptcy – Earlier this week Slate ran an informative piece explaining why California can’t go into bankruptcy. The simple reason is that there is no law to allow it to do so. Here’s a bit from the essay:
Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn’t include states. (The statute defines “municipality” as a “political subdivision or public agency or instrumentality of a State”—that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11th Amendment, which means they can’t be sued. In other words, they don’t need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum.
Say the state can’t make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state’s debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors’ committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state’s budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)
As you can see, a default by California and subsequent receivership, would not only be unprecedented, it would be unwieldy and probably ugly. The same would be true in the case of other states.
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