Desperate times may require desperate measures, but the idea of a state government being allowed to declare bankruptcy is just daft.

Yet that option reportedly is being discussed behind closed doors on Capitol Hill and one prominent Republican, Newt Gingrich, says he thinks it’s a good idea.

Gingrich, former House speaker, predicts legislation is imminent.

The plan, according to, would allow a state to declare bankruptcy in much the same way as a business.

The list of corporations that have declared bankruptcy is long and most recently includes Chrysler and General Motors.

Chapter 11 bankruptcy protects a company from creditors until a judge approves a plan to make the firm viable again.

While rarely used, Chapter 9 of the bankruptcy code allows municipalities to seek similar protections and adjust their debts. This chapter was used in 1994 by Orange County, Calif.

The same chapter could, theoretically, be extended to severely troubled states like California, New Jersey and Illinois.

Employee unions immediately dislike the idea because it could allow a court to strip away benefits or alter pension plans to reduce a state’s debt.

And, indeed, the most troubled states do have large unfunded pension and health care obligations.

On the other hand, a judge could simply order state officials to raise taxes.

The immediate danger of the bankruptcy idea is the impact it would have on investors and the bond market.

Government bonds are currently considered among the safest of investments and, as a result, state governments pay very low interest rates to borrow.

The mere existence of a bankruptcy option would raise the risk level and, as a result, lead to higher interest rates for all states.

The actual implementation of a bankruptcy would likely ruin a state’s credit rating and increase prices from suppliers and contractors.

The motivation behind the proposal seems to be fear that a mega-state like California will collapse and the federal government might be forced to step in with a bailout.

The last time a state went bust was in 1933 when Arkansas, beset by large debt, the Great Depression and several natural disasters, defaulted on its bonds.

The federal government did not offer a bailout, and there is no reason the federal government would be obligated to do so today.

Arkansas was simply unable to collect tax money from its severely impoverished residents, according to a story Friday in the New York Times. It eventually restructured its debt with bond holders and slowly clawed its way out of the hole.

It now has one of the lowest debt ratios in the U.S.

Today’s situation is far different. California, for instance, is one of the wealthiest states in the country.

Its problems simply stem from a long-term political inability to sufficiently cut costs or raise revenue.

California could clearly cut and tax itself out of the red. While the money is available, California politicians simply lack the political will to raise taxes.

There is also strong opposition to allowing states to declare bankruptcy, including from officials in some of the most troubled states.

Texas Gov. Rick Perry probably put it best when he said, “Bankruptcy should not be a bailout for states that have been poorly managed.”

He’s right.

[email protected]

Only subscribers are eligible to post comments. Please subscribe or to participate in the conversation. Here’s why.

Use the form below to reset your password. When you've submitted your account email, we will send an email with a reset code.