Strengthening Constitutional Self-Government

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The States of Bankruptcy

In Slate, Christopher Beam describes why California cannot declare bankruptcy:

 Chapter 9 of the U.S. bankruptcy code allows individuals and municipalities (cities, towns, villages, etc.) to declare bankruptcy. But that doesn't include states. (The statute defines "municipality" as a "political subdivision or public agency or instrumentality of a State"--that is, not a state itself.) For one thing, states are said to have sovereign immunity, as protected by the 11th Amendment, which means they can't be sued. In other words, they don't need any protection from angry creditors who would take them to court for failing to pay their debts. As a result, states can simply borrow money ad infinitum.

If I follow the logic, states do not need bankruptcy.  They can simply repudiate debts at will. That's what sovereign immunity means.  Here's my logic. Law, by its nature, seeks to balance problems and remedies.  Clearly, states may sometimes borrow more money than they can repay.  What, therefore, is the remedy in such cases?  If not bankruptcy, and if the states have sovereign immunity, that suggests to me that the states may simply repudiate debts as they choose.

If states may do that, why would anyone lend them money, or sign a contract with them?  The same reason that people lend money to the federal government (which also has sovereign immunity), or lend it money: they expect to be repaid.  As a general rule, in other words, it is a terrible and dangerous thing for any government to repudiate its debts.  That does not mean it is illegal, and it does not mean it would never be necessary. Indeed, the threat of repudiating debts could be used to renegotiate contracts and debts.

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Discussions - 3 Comments

Repudiation has been used punitively as well; as just once instance thereof the United States repudiated all debt incurred by the Confederacy.

Properly used, repudiation can be a tool of statecraft as valuable as any other.

Very interesting analysis. Does this mean that a State such as California could repudiate (and by virtue of this threat, force renegotiation of) its pension obligations to public employees? It certainly needs to and they certainly deserve it.

States do have sovereign immunity....Originally the court in Chisholm v. Georgia said that they didn't. The states didn't like this result so they passed the 11th Amendment. They actually have more sovereign immunity than the federal government since congress consented to allowing the federal government to be sued in 1346(a) and (b).

Some states have waived more sovereign immunity than others, but it is clear that state officials acting in an official capacity cannot be sued. California probably could repudiate and to the extent it has consented to suits could probably limit the amount paid out. My guess is that California could repudiate to an extent, but that pension obligations have written into contracts certain provisions where California has waved its sovereign immunity.

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