Don’t close door on California bankruptcy option 

Congressional Republicans “should be ashamed of themselves for even suggesting” bankruptcy as an option for California and other debt-plagued states, according to Sacramento Bee columnist Dan Walters. Unlike municipalities, states aren’t allowed to go bankrupt, but some conservatives have talked openly about changing the law and Walters, echoing conventional inside-Sacramento wisdom, is aghast at the thought.

Walters quotes state Treasurer Bill Lockyer, who argues that “No state needs to declare bankruptcy. The states have sovereign taxing authority.” Lockyer, who has recently argued that the state merely suffers from a bad national economy and who downplays California’s half-trillion-dollar pension debt, promotes one handy solution to everything: higher taxes. His point is that the state is not really insolvent because it can keep increasing the tax burden on its residents.

How soon will it be after a dramatic tax increase before the state faces the same problems it faces now — given that the state government is not willing to reform itself? What are the chances the public will approve new taxes or that the Legislature can get the necessary two-thirds vote to do so? Even if the state’s leaders could raise taxes at will, how long will it be before businesses and taxpaying residents make a beeline for Arizona or Texas, thus causing an eventual decline in revenues?

Allowing states to declare bankruptcy would not be a panacea. Vallejo, for instance, is now emerging from bankruptcy and chose mainly to cut public services rather than rework the pension obligations and salary levels that put the city in its bind. But this state and a handful of others are fundamentally bankrupt. They spend far more than they receive in revenue year after year.

Lockyer and other bankruptcy opponents argue that states face political problems and aren’t bankrupt in a technical sense, but legal rulings and political limits are genuine obstacles to financial heath. We can’t magically erase those obstacles — except through bankruptcy court.

For instance, California has been promising unsustainable benefit packages to its government employees, but the courts have ruled that once those benefits are granted they are a binding contract. And the state faces a political climate that simply won’t allow for the serious reforms needed to avoid insolvency or to fix long-term debt problems.

The rules are rigged in favor of unions at every level. Thanks to redistricting and union expenditures, the political rules are largely set in stone as well. We’re at the point that any reform that can pass won’t do anything that fixes things, while anything that would actually fix things can’t possibly pass.

Even some conservatives are blasting the bankruptcy option. Scholars at the Manhattan Institute argue that bankruptcy would spook the bond markets and that the state already has needed powers to reform the system now. The state has those powers but it can’t use them for the reasons detailed above. If California went bankrupt, by contrast, Gov. Jerry Brown could say, “I hate to make these cuts, but the judge made me do it.”

Congressional Republicans already are backing away from the bankruptcy idea, which should warn us that the new GOP will be just as squishy as the old one. Still, the bankruptcy option for states needs to be widely debated rather than shut down by advocates for the status quo.

Steven Greenhut is editor of; write to him at

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