A political firestorm was supposedly ignited by Senate Majority Leader Mitch McConnell (R)-Kentucky when he suggested letting states go bankrupt.
McConnell suggested allowing it rather than having the federal government bailout states whose budgets and revenue streams have been decimated by the coronavirus economic shutdown.
Though derided by many on both sides of the political aisle, the idea is getting a thorough looking at as a way out.
WWL spoke with Dr. Walter Lane, Professor and Chair of the University of New Orleans Department of Economics and Finance about state bankruptcy. He says it’s not a new idea:
“There’s been some speculation about that already. Connecticut, Massachusetts, New Jersey and Illinois in particular, the current crisis in states like Louisiana is raising some new questions.”
Lane says the states previously considering such an action are ones facing enormous pension commitments to government workers.
“They would be able to NOT have to pay all of their pension liability, that’s one of the biggest things,” Lane says. “So people on a government pension in the state of Louisiana could have their pensions CUT.”
Lane says legalizing bankruptcy of a state is a long legal process played out on a national stage:
“It would end up going to the Supreme Court to find out that’s possible or not,” he states. “Because it’s explicitly prohibited. The only other way is for Congress to pass legislation.”
Even if state bankruptcy is approved by Congress and states do declare bankruptcy it’s not a process anywhere as simple as Chapter 11 reorganization.
The first move, even before bankruptcy is used as a final solution, is drastic, draconian cutting of state programs.
In Louisiana… “The Medicaid program is the biggest program in the state. Higher education is another big area where they can cut,” Lane explains. “So many other things are protected by statute, what can they do with those? That’s where the bankruptcy can free up some other areas for further cuts.”
In the end, a bankruptcy court, working to settle with the holders of state debt, will impose even further chopping of services and ultimately state assets:
“The consequences would be a bankruptcy court require the state to liquidate state parks and buildings and things of that sort.”
In many states, like California, state office buildings and other historic state buildings were sold off to meet pensions. Those buildings are now privately owned and managed with the state leasing them back.
In 2010, Arizona sold off nine historic state buildings, including the Supreme Court and House and Senate buildings during a state fiscal crisis prompted by the Great Recession.
Could the same thing happen in Louisiana?
