David Skeel has initiated a cottage industry in legal academia on the topic of restructuring mechanisms for financially ailing states. In doing so, he has drawn comparisons to the fiscal positions of both municipalities and sovereigns while incorporating the constitutional debate regarding the federal government’s abilities to compel states to adhere to financial obligations. The result of this analysis is a proposal for a state bankruptcy process that would resurrect a financially failing state while fairly distributing its available assets to all stakeholders—creditors, residents, and employees.
While I find little to disagree with in what Professor Skeel has written, I would like to raise a few issues regarding the implicit and sometimes explicit assumptions that likely influence a preference for formal state bankruptcy procedures. In addition, while I acknowledge that state bankruptcy could have substantial benefits, it would also produce certain by-products that make the extent of those benefits less certain. For example, a state bankruptcy regime may influence strategic reactions to entitlements that could have fairness implications. One such reaction on the part of a state would be to threaten bankruptcy in order to induce the government to provide a bailout.
The purpose of discussing the by-products of a state bankruptcy regime is not to refute Professor Skeel’s position. Instead, it is to provide a cautionary tale and an admonition to consider the strategic consequences of the regime alongside its benefits.