At a February hearing in the U.S. House of Representatives, both Republicans and Democrats criticized a proposal to allow states to file for bankruptcy to escape their debts, calling it an unnecessary intrusion into local affairs that could roil the bond market. Former House Speaker Newt Gingrich, who badly wants to be elected President, has advanced the idea. However, the chairman of the House Judiciary Committee, Republican Lamar Smith, said that allowing bankruptcy filings could penalize states with higher interest costs – including states with sound balance sheets. Representative John Conyers, a Democrat from Michigan, said it is a “useless” idea. Democrat Hank Johnson, a Georgia Democrat, said, “State bankruptcy may be a solution in search of a problem.”
Suggestions that states should be allowed to file for bankruptcy, as cities can, have drawn criticism from federal lawmakers in both parties, state officials and public-employee unions, whose contracts might be jeopardized in a filing. States were left out of a Depression-era law that allows municipalities to reorganize their finances under Chapter 9 of the Bankruptcy Code, a provision that has largely been used by small sewer and utility districts. Since Vallejo, Calif., a 115,000-person town, filed for bankruptcy in early 2008, no city of that size has followed its lead.
The skepticism about allowing states to seek protection from creditors was echoed by experts invited to speak before the subcommittee. “Legislating state bankruptcy would disrupt the current municipal bond market and undermine investor confidence,” said the managing director of a Massachusetts-based municipal bond firm.
In a piece of troubling economic news, U.S. states are forecasting a collective $125 billion in budget deficits for fiscal year 2012, according to a study by the Washington-based Center on Budget & Policy Priorities. However, there some signs that states are beginning to emerge from the worst effects of the recession. U.S. state tax collections headed for their biggest jump in more than four years during the last three months of 2010, the fourth-straight increase, according to a study this month from the Nelson A. Rockefeller Institute of Government in New York.
In Alabama, our State’s constitution requires the Legislature to construct and pass a balanced budget every fiscal year. Consequently, all state agencies and entities in Alabama which depend on state funds are bracing for a budget shortfall at the end of fiscal year 2011 and for even more significant cuts in fiscal year 2012. Our elected leaders have a great deal of work ahead as they navigate the state through these difficult financial times. If you need additional information on this matter, you can contact Clay Barnett, a lawyer in our Consumer Fraud Section, at 800-898-2034 or by email at Clay.Barnett@beasleyallen.com.
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