Under current law local governments can shed debt and pension obligations by going through the process set up by Chapter 9 of the Bankruptcy Act. But state governments can’t. Back in November University of Pennsylvania Law School Professor David Skeel, a bankruptcy expert, argued in the Weekly Standard that that the law should be amended to give state governments that option. It would give state governments a chance to get out from under the horrifying pension obligations state officeholders and the public employee unions have burdened them with, and would therefore also give state officials a powerful bargaining weapon in negotiations with the unions. I wrote one of my Washington Examiner columns on the subject, making reference to and endorsing Skeel’s idea.


Now the business section of the New York Times is reporting that there is widespread interest in Skeel’s proposal. It quotes Skeel as saying, “I’ve never had anything I’ve written get as much attention as that piece,” referring to the Weekly Standard article. Of course it’s not pleasant to contemplate the fate of pensioners and bondholders whose pensions may be cut and whose bonds may be reduced in value. But the alternative is for some profligate state government (think Illinois, or California) to come to Congress, the White House and the Federal Reserve saying that it will default with various disastrous consequences unless it gets a multibillion bailout. It’s morally objectionable as well as economically harmful for taxpayers in states with solvent governments to bail out the public employee unions who have rendered some state governments insolvent.