Could the crisis over the coronavirus result in a new law providing a way for states to declare bankruptcy? It’s starting to look like the answer may be yes. That’s what we take from the comments today by Senator Mitch McConnell. The Senate majority leader, in a radio interview with Hugh Hewitt, is stating this flatly. He would, he says, “certainly” be “in favor of allowing states to use the bankruptcy route.”
That would represent a radical reform. The Constitution grants Congress the power to establish uniform laws for bankruptcies throughout the country. Yet the bankruptcy code lacks a chapter extending such protection to states, which might be why some of them have become so profligate. That combined with the coronavirus has put some of them on the brink of collapse.
This erupted in the news when the President of the Illinois senate, Don Harmon, wrote a letter to the Illinois delegation in the U.S. Congress asking a bailout of more than $40 billion for the state. Chicago Tribune blew its stack in a memorable editorial. What was so galling about it, at least to us, is that Mr. Harmon sought a $10 billion bailout directly to the Land of Lincoln’s long-underfunded pension system.
That had nothing to do with the pandemic, of course; it was about years of mismanagement of Illinois’ budget. New York and California have also dug themselves into shockingly deep holes. For any state in such circumstances to suggest that its obligations ought be paid by taxpayers in other states boggles the mind. Particularly when many states’s pensions are far more generous than those of private employers.
So what about the bankruptcy option? In the 1840s, several states defaulted on debts. A bankruptcy law to deal with the crisis stayed on the books but two years before being repealed. There are other problems than that experience. The 11th Amendment puts up hurdles to suing a state in federal court. There is the contracts clause. Plus, the Constitution requires the United States to guarantee to each state a republican form of government.
So it could be difficult to put a state under the control of a receiver. The Sun is not a lawyer. One law professor, David Skeel, Jr., writing in 2012 in the University of Chicago Law Review, considers both sides and still reckons that a bankruptcy process could be preferable to other methods of dealing with states that have become over-extended. What we like about it is the radicality of what Senator McConnell is talking about.
By even discussing favorably the principle of using bankruptcy to deal with mismanaged states, Senator McConnell marks an important point. It is one thing for the Congress to legislate relief during the pandemic. It is another to bail out states for their own failures. Mr. McConnell reckons the first choice of the states “would be for the federal government to borrow money from future generations to send it down to them now.” That, he adds, is “not something I’m going to be in favor of.”