Just as Fortune 500 companies can declare bankruptcy, states in dire financial straits would be able to do the same if a plan outlined by Law School professor David Skeel were passed.
Skeel, who teaches corporate law, recently testified in front of Congress about a proposal he authored. Skeel first proposed his idea in The Weekly Standard in November 2010.
Toward the end of January, he authored an opinion piece in The Wall Street Journal in which he re-advocated his position.“There needs to be an absolute last resort if all else fails,” Skeel said of the plan. “Our absolute last resorts now are either federal bailout with Congress coming to the rescue, which seems like it’s not something it can do, or a state could default on its obligations and simply not pay,” he explained.
Bankruptcy is a superior alternative to both these last resorts, Skeel continued. He has twice testified this month before Congress, most recently on Feb. 9 before the House of Representatives Committee on Oversight & Government Reform.
One of the most significant tenets of state bankruptcy is that it would allow debtor states more power to renegotiate union contracts, according to the text of his piece in The Weekly Standard.
Response to his proposal has been mostly divided along party lines. So far, “folks who like the bankruptcy idea tend to be conservatives because they think it’s a way to whack the unions... and the flip side is that Democrats don’t like the idea for the reverse reasons, but some folks have been shortsighted when they look at it that way,” Skeel said.
Penn Law professor Jonathan Klick thinks “it’s a feasible plan because it hasn’t been done in the past, as states now are facing huge fiscal pressures ... whether it’s likely or not is a whole other issue,” he said.
Former Pennsylvania Governor Ed Rendell called state bankruptcy “not a realistic solution,” at a speech in Houston Hall Wednesday.
“Once a state goes bankrupt, they’re never going to get ... credit again,” he said.
Former Speaker of the House Newt Gingrich, who spoke at Penn on Tuesday and has been a strong advocate of allowing state bankruptcy, said the idea is “worth examining.”
Gingrich said, “[we] want to send a signal to the state capitols that a federal bailout is not coming."
Skeel emphasized that his proposal for state bankruptcy is only a last resort.
“The hope is that no one will end up using it, that somehow states like California will all end up working through their fiscal crises, but it's not clear that they will," he said.
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