Featured Article – 2011 March

State Governments: The Next Wave of Bankruptcy?

by Tom Beane

If you take a look at Wall Street, it seems like the economy, if not booming, is at least once again rolling steadily forward. But we know the recovery hasn’t taken hold in all economic sectors, and the distressing number of vacant storefronts in small towns and strip malls tells us that Main Street is still feeling the pain.

While the Wall Street/Main Street contrast continues to draw attention, more than a few financial pros are wondering whether some state governments might be the next major sector of our economy to fall. Indeed, the thought prompted the Turnaround Management Association, of which I’m a member, to conduct a poll on whether Congress should consider passing legislation that would allow state governments to file for bankruptcy.

The result: TMA members voted, by more than a 2-1 margin, against the idea.

Supporters of the legislation, TMA reported, argued that being able to file for bankruptcy would enable states to get out from under debilitating debt loads and onerous union contracts without having to request a federal bailout. Opponents, who came out well ahead in this poll, contended that letting states file for bankruptcy would merely shift the burden for their debts onto the federal government.

The survey even drew the attention of the Wall Street Journal, which interviewed former TMA President Patrick Lagrange. “At the end of the day, Chapter 9 is not going to be something that replaces hard political choices that need to be made,” Lagrange told the newspaper. He also said he doubted it was possible to engineer a bankruptcy law capable of fully encompassing “all of the complexities at the state level.”

The hard political choices to which Lagrange refers include reducing services and raising taxes. It doesn’t have to be all of one and none of the other. If you’ve looked at the containers of ice cream in the supermarket lately, you’ve no doubt noticed that they’re smaller and cost more than they used to. That may be the best recipe for state governments to get their finances back in line. The challenge will be to find the right balance.