That may be the top story this week starting with Thursday’s New York Times article. No state including Ohio, is immune. At the moment, Ohio is not one of the states being mentioned. Illinois seems to be the prime candidate.
Regardless of state, this could make GM’s bankruptcy seem fairly simple. For one thing, Congress would have to approve it since states are now prohibited from declaring bankruptcy. And there are other major constitutional questions including the doctrine that states are regarded as sovereign. Well, sort of, as long as they don’t run afoul of the U.S. Constitution which is supreme. Entities of the states, such as cities, are in a different legal situation.
The people most at risk are probably state employees and state bond holders. “Creatures of the state” such as municipalities are at risk in terms of funding. Also at risk nationally are state pension holders. A number of states’ pension funds have already been “raided” to help fund other programs. (Sound like how Social Security got into trouble?)
One alternative being discussed is a New York City type solution. In the mid-1970s, “The Big Apple’s” fiscal tribulations caused the creation of the Municipal Assistance Corporation to guide “The City” through its crisis. Not bankruptcy, not self-governing, but some in-between status especially regarding anything financial. In reality that was virtually everything.
Supposedly Congress has not yet done anything official such as introduce a bill. This whole idea presumably “got legs” when Newt Gingrich made some comments as part of a speech on public debt.
Since around Thanksgiving, state bond funds, whose income is exempt from federal and sometimes state income tax, have seen roughly $25 Billion dollars withdrawn.
None of this considers the politics. Senators and Representatives from both parties are split. Many were elected with the help of those, such as Tea Partiers, who want less federal government. Yet these same officials took an oath to represent their constituents’ and this nation’s interest. Politics, practicality, and principle will likely conflict more than usual in this fight. And not surprisingly it is about money.
As someone who favors less government, it will be interesting to see how Ohio’s new Gov. Kasich responds to this idea.