House Judiciary Committee Chairman Signals Opposition to Bankruptcy for States

The powerful chairman of the House Judiciary Committee signaled his opposition Monday to allowing states to file for bankruptcy, throwing up another major hurdle to Congressional approval of the proposal.

“While bankruptcy for states may seem like an attractive alternative to state bailouts, there are constitutional and policy concerns with this approach,” Rep. Lamar Smith (R-Texas) said in an opening statement at a Judiciary subcommittee hearing on the idea.

Smith’s committee oversees the federal bankruptcy code, which would have to be amended to allow states to file for bankruptcy. Among others, former House Speaker Newt Gingrich has been pushing the proposal as a way to help states escape some of their fiscal woes to avoid federal bailouts of states.

Supporters say the bankruptcy option would at a minimum give states more leverage in negotiating cuts in rising retirement and health care benefits for state employees.

But adding to previous comments on the issue, Smith said allowing states to file for bankruptcy could in fact make their fiscal problems worse.

“I am..concerned that a state bankruptcy option may actually encourage states to borrow more money, knowing that they could later restructure their debt in bankruptcy,” he said. “Future borrowing levels would thus increase even in spendthrift states.   And borrowing would be at higher interest rates for all states because lenders would justifiably charge a price for the risk of state bankruptcy.”

On constitutional concerns, Smith said, “I am unsure whether Congress has the constitutional authority under Article I to allow a state to seek bankruptcy relief. States are co-sovereigns in our system of federalism and have authority to tax and spend.”

Smith added that “even if Congress could enact a state bankruptcy chapter, it is also highly unlikely that any state would ever take advantage of it. The National Governors Association and the National Conference of State Legislatures have announced that states do not want bankruptcy relief and would not use it.”

Smith said that rather than rely on the ability to file for bankruptcy to restructure their finances, states should “put their fiscal houses in order.  Even the governors of traditionally union-friendly states already have taken steps to reduce state spending and reform their public employee pension systems.”

For the same reasons, House Majority Leader Eric Cantor (R-Va.) said last month he opposed amending the bankruptcy code to help states.

Smith, like Cantor and some other Republican leaders in Congress, also said he opposes any Washington bailouts for states.

“The era of federal bailouts is over,” Smith said. “Congress should not take money from taxpayers in fiscally healthy states to give to public employee unions in a handful of spendthrift states.”

One conservative group pushing a change in bankruptcy laws to help states, Americans for Tax Reform, said it was “premature for anyone to rule out state bankruptcy as the optimal tool to rectify states’ $3 trillion unfunded pension liability and prevent a bailout of the most fiscally reckless states in the union.”

“The issue of state bankruptcy is quite complex, with many moving policy, political, and legal parts,” ATR said. “As such, the recent hearings on the matter serve as the opening salvo in a long and healthy debate in congress on state budgetary problems.”

Fox News’s Jim Angle contributed to this report