So Mitch McConnell said that states should declare bankruptcy if they can’t pay for the Corona crisis. I don’t want a political debate about that; what I want know is what it means factual for a state to declare bankruptcy.
Do they stop paying off bonds they issued?
Do they have to lay off or fire employees?
Do they have to cut back services?
Would they need to cut or raise taxes?
I am just interested what the practical effects a bankruptcy would have on the average resident of a state, if any.
It’s just political rhetoric.
There is no provision in the bankruptcy law that allows a state to go bankrupt.
We can say what it mean for a corporation, for example, to go bankrupt because Title X of the bankruptcy code says such-and-such happens and Title Y says such-and-such happens. But there is no title that says that either a state can go bankrupt or what happens if one goes bankrupt.
Mitch McConnell is in a position to try to pass a law allowing states to go bankrupt. If and when he actually does so, we can read the text of the law and find out what it means for a state to go bankrupt. Until then, it is just rhetoric.
Its not the same thing as being bankrupt, but I remember when California had their economic crisis.
They were making large cuts and paying with IOUs.
There is no provision in federal bankruptcy law allowing states to file, and [characterization omitted] McConnell isn’t about to convince the House to change that.
US Constitution Art.I Sect.10: “No State shall… pass any… law impairing the Obligation of Contracts…” IOW what a state obligates itself to is not revocable. States can’t cast creditors aside. But why let the Constitution get in the way? Just issue an executive order declaring states in default, and force hostile Federal takeovers. Right.
Discussion of whether SCOTUS would OK this is probably for another forum.
Exactly.
States don’t get bankruptcy protection – chartered entities they create may (Title IX) but not the state itself, as a legally sovereign entity. It would violate the Contract Obligations Clause.
Non-states like DC and Puerto Rico when in a fiscal crash got special ad hoc laws placing them under guidance from an Oversight Board the federal government appoints to force them to bite the bullet and endure the pain (and the law passed for Puerto Rico in 2016 was very deliberately engineered to avoid having anyone get any ideas about asking for the same for the states, making it clear the US would NOT assume the debt). But constitutionally these are non-sovereign dependencies of Congress, who thus has broad range on intervening to overrule a failing local government.
Really what it means is the state does not have enough money to pay the bills. Presumably, they could simply tell some people that they owe money to “Sorry, we paid what we had to those guys first so you’re outta luck.” Then, the courts get involved as various aggrieved parties get involved and the court orders the state to pay Bob the money owed, or a fraction of it, when their next wad of income tax or sales tax comes in. I assume the courts could order the state officials locked up personally if they failed to obey, so hope the state is paying the police and lets them know under what circumstances their paychecks stop. And, the city cops too. Otherwise, it gets ugly. More likely, you end up with intense and game-of-chicken negotiations, where the collective of creditors sit down with the state officials and hash out a payment plan, how many cents on the dollar, how regular the payments, what taxes have to go up, what services get cut- much as happens when large corporations or Greece or third-world countries go broke. Third world countries tend to borrow in dollars or Euros (Greece), so are in the same boat as states - they can’t print money to get out of the hole, like the fed can. Short answer, it sucks to live in a place that has terminally overspent for whatever reason - services, salaries, pensions, infrastructure maintenance are all on the chopping block, but taxes are going up. It becomes a crappy place to live (think, Detroit and its money troubles) and any business that can will pick up and leave. Basically, not something intelligent federal politicians would let happen. ( …intelligent… )
Allowing state bankruptcies would allow the state to unilaterally declare what debts they don’t want to pay, what salaries and pensions they want to cut, etc. alternatively, the federal government would be empowered to create a receiver to manage the state and its debts. Either option is a recipe for disaster, both economic and political.
Not…quite.
States wouldn’t be able to declare who and what they want to pay. I’m just speculating here but if congress passes a law allowing states to declare bankruptcy - and it followed existing law - some sort of special master or similar would be in the position of resolving the issue.
Maybe a financial control board similar to what Washington, DC had during the 90s? I’m aware that it’s not a true parallel…but nothing is. We’d be on new ground if this occurred.
Anyway, the financial control board in DC had essentially power to bind and loose all aspects of fiscal management. So such a board could do most anything if it wanted. Wipe out muni bonds, eliminate pension plans or whatever.
Regardless, it wouldn’t be fun.
I assume a proper “state bankruptcy” law would put some extra authority in charge of the state’s financial behaviour. Absent such legislation and oversight, presumably a state would be able to pick and choose what bill it chooses to pay, at least until the courts step in and order some semblance of fairness and logic to the payment of creditors. However the ability to say “otherwise you won’t get anything” would be the sort of leverage that would allow the state or the trustee to negotiate alternate payment plans with creditors and unions.
Actual bankruptcy proceedings in normal cases simply formalizes the rules over who gets priority payments and also the recognition that the debt can an may be reduced by a substantial amount - modified by years of precedent to clarify the law. It would be surprising if a bill dreamed up in a matter of days or weeks would be as well thought out.
So depending on who writes the law, it could allow for the President to appoint a financial manager to manage the state’s finances?
I’m not a bankruptcy person, so I won’t try to answer the specifics, but I assume it would almost certainly track Chapter 9 of the Bankruptcy code, which applies to municipalities and instrumentalities of a state.
I don’t think that a state itself can declare bankruptcy under Chapter 9 (although, I assume, changing that would be as simple as changing the definition of municipality).
But I also don’t know what we mean when we talk about a “state” declaring bankruptcy. For example, Puerto Rico (and its instrumentalities) is excluded from Chapter 9, which was frequently popularly discussed as preventing Puerto Rico from declaring bankruptcy. But one of the proposed “solutions” was to amend the law to treat Puerto Rico as a “state” for purposes of Chapter 9… which also wouldn’t allow Puerto Rico to declare bankruptcy (but would allow its instrumentalities to do so). Presumably whatever was meant by allows Puerto Rico is declare bankruptcy by amending Chapter 9 is already available to the various states.
Which in the end, did not happen. When absolutely forced to, Congress came up with a special legislation specific to the Puerto Rico case, with a virtual drafting mandate of making it so it would not risk “contagion” to the states.
There have been municipalities and counties in the US that have went through bankruptcy. Unlike normal corporate bankruptcies whereby the creditors normally take over as the equity holders and then sell the company to new owners, creditors are not going to be taking over a government entity.
States have the power of taxation to raise funds to meet their obligations. In many cases, the government can renegotiate with their creditors, such as pension participants (which are usually large obligations of a state), or bondholders on interest, maturities, etc.
That’s true. My point was only that it was considered conversationally acceptable to talk about the Bankruptcy Code as preventing Puerto Rico from declaring bankruptcy and calling for Puerto Rico to be treated like a US state (thus allowing it to “declare bankruptcy”). But, of course, the proposed “fix” would not have allowed the Commonwealth of Puerto Rico to declare bankruptcy (rather, it would allow its instrumentalities to do so). Given that, I don’t know what a state declaring bankruptcy means for the purposes of this question (or in the context of saying that it can’t be done under the current law).
In the other thread on the subject the matter of what would a state bankruptcy involve (and what’s the possible thought behind floating the notion) is dealt with more. But you are right, Falchion, in that it’s a term that is used (abused?) colloquially to mean “any process to legally forestall both debtor and creditor getting destroyed by insolvency”.
But yes, historically the states, as legally sovereign entities, have not had the option of bankruptcy as legally defined, placing themselves under the protection of an independent judicial authority to organize the least bad possible outcome; but rather would have to recur to defaulting and forcing a renegotiation the hard way.
Here’s my question then. Suppose the state passes a law giving someone a certain amount of money if they meet certain criteria and the person meets those criteria, fills out the correct paperwork to get the money, etc. - basically doing everything they need to do for the money but before the money is distributed the state then says, “Naw we aren’t going to give you the money.” Is that a violation of the Contracts Clause? Promissory estoppel? Does my mileage vary based on the state/feds?
Well, historically, there were other states that were, for a while, other sovereign entities. But when that ended, and these ‘Confederate States’ were taken back, their debts were specifically not assumed. So the holders of these debts were just out of luck – they didn’t get paid.
I don’t see how that precedent would apply to the current situation.
I assume McConnell means for the State to default on it’s bonds. Which are held by ordinary people, mostly in their retirement funds. :mad:
IANAL but I assume this falls into contract law. If the state said ``we will give you…then too bad; if the state said ìf you do X for us, we will give you $Yand the amount is commensurate with the work, then it`s a contract and failing to pay means facing the creditor in court.
There are at least two meanings of ‘bankruptcy’. One is the colloquial meaning, being broke. You don’t have the money to pay everyone you promised in full and on time.
Recent political posturing is focused on a more legalistic meaning of the term as a particular organized process to deal with such a situation. Like Chapter 11 in US federal law for corporations or 9 for municipalities, where creditors must wait for a general solution applied to all of them by a bankruptcy court. That solution could feature all the things you mentioned (for a municipality) but it’s decided case by case in an organized way under those procedures.
Without such a procedure it becomes pretty much completely unworkable for a large entity to fail to pay as promised, because there’s a legal free for all of each creditor acting separately. If you don’t have an organized procedure for states, then the only possibility ultimately is for the federal govt to loan/give them money to pay everyone they owe. Thus it’s somewhat understandable that people who favor that solution oppose including states in Chapter 9 or some new procedure. But it’s somewhat disingenuous to claim that such a procedure ‘couldn’t work’. It’s more honest to just say ‘my preferred solution is for the federal govt to just bail them out, which everyone will recognize as the only solution if I can prevent any kind of organized bankruptcy process’.
This position isn’t 100% free from internal inconsistency though, besides often being presented disingenuously as ‘bankruptcy for states couldn’t possibly work’ (sure it could). That is, a model that only allows federal bailout of the states or chaos, the choice will always be a federal bailout, and therefore all state/local bond holders will get paid in full. But municipal bondholders tend to be wealthy individuals. People who want federal bailouts of everything also usually think wealthy individuals should pay more to support society (‘their fair share’). Although, a bankruptcy procedure would in at least some cases result in cuts to public employee job numbers, wages and/or benefits as well. It depends on states’ laws and constitutions and specific contracts how the pain would be spread. But bondholders have paid heavily in municipal bankruptcies generally, in Detroit for example, just like they do routinely in corporate bankruptcies.
I’ve always wondered something that’s related. How exactly did it work when Miami declared bankruptcy and was, I think, just incorporated into Dade County? Correct me with facts of I’m not remembering this right. Was that handled by Florida courts or federal? How did it work? I’m assuming it might be precedent of some sort of states wish to do so.