States of Insolvency: What Happens When (If) a State Runs Out of Money? The Legal and Economic Issues Surrounding State Fiscal Imbalances

Joseph V. Kennedy

Municipal Finance Journal, 2016, vol. 36, issue 4, 39 - 111

Abstract: This study discusses the unique role states play in the federal system and the constitutional issues surrounding their status. It reviews the causes and unpredictable outcomes of previous instances of state insolvency and considers the current fiscal health of states, giving a rough estimate of the liabilities they face and highlighting the main issues likely to affect their ability to meet future challenges. It reviews the recent debate over whether to create a formal procedure by which a state can restructure its liabilities, beginning with a review of Chapter 9 in the expectation that any new law to govern states will work in a similar manner. It also discusses two alternative avenues for handling insolvency: a federal bailout with or without conditions and a unilateral default similar to defaults that occurred in the distant past.

Date: 2016
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