State Bankruptcy Revisited

David Skeel

Summer 2020

The Covid-19 pandemic and the economic shutdowns undertaken in response have ravaged state budgets across the country. Both unexpected new costs and massive revenue losses have left states reeling, exacerbating the challenges facing those states that were already in fiscal trouble. This has sent several of those states looking to Washington for help, raising the question of just how Congress ought to offer assistance.

In the context of these discussions, and to nearly everyone's surprise, Senate Majority Leader Mitch McConnell declared in an April 22 radio interview that states should be permitted to file for bankruptcy. "I would certainly be in favor of allowing states to use the bankruptcy route," he said, adding "there's no good reason for it not to be available." His comment rekindled a debate that flared up a decade ago but has since subsided.

While the response to McConnell's remark was highly critical — even the Wall Street Journal chided the majority leader — many critics seem to have misunderstood what he was calling for and under what circumstances. In a New York Magazine column called "Why Mitch McConnell's State Bankruptcy Idea is so Stupid," Josh Barro, ordinarily a very thoughtful journalist, seemed to assume McConnell would resist giving any pandemic-related aid to states at all. "At a time when households are already immiserated by crisis and many businesses are closed," Barro wrote, McConnell "would ask them to pay more in taxes and receive less in government services" due to adjustments states would be forced to make. This would take money out of citizens' hands and, in Barro's estimation, "wreck the economy."

Starving the states would indeed have widespread, pernicious effects. But this is not what McConnell advocated, either in the interview or in subsequent statements. McConnell's endorsement of state bankruptcy came not as an isolated remark, but in response to the leak of a letter from the president of the Illinois Senate, Don Harmon. In addition to $31 billion in other federal aid, Harmon had asked for "$10 billion in pension relief, directly for the state's retirement system" which, prior to the crisis, was underfunded by an estimated $469 billion. It was the attempt to use the prospect of an aid package not just to replace revenues lost from the economic shutdown, but to bail out a state for fiscal irresponsibility that long predated the pandemic, that McConnell rejected. "There's not going to be any desire on the Republican side," he said, "to bail out state pensions by borrowing money from future generations."

Supposing Congress does intend to help fill the coronavirus-caused hole in states' budgets as an insurer of last resort, would it still be "stupid" for Congress also to put a state-bankruptcy framework in place as part of the overall aid package?

The answer to that question is "no." During the first debate over state bankruptcy that occurred in the aftermath of the Great Recession, I was a vocal advocate of the idea. As I revisit the issue a decade later, after nearly four years as a member of Puerto Rico's oversight board, I recognize that the case for state bankruptcy is a bit more complicated than I once imagined. But it remains an entirely compelling one.


In the wake of the 2008 financial crisis and recession, California, Illinois, and a handful of other states faced alarming structural imbalances in their budgets, largely because they had made unsustainable pension promises to their public employees. Projecting a $20 billion deficit in 2010, then-California Governor Arnold Schwarzenegger signaled his intent to ask Congress for a bailout but encountered widespread resistance.

In early 2011, the debate suddenly became much more serious. In an opinion column written for the Los Angeles Times, former Florida governor Jeb Bush and former House speaker Newt Gingrich declared their support for a state-bankruptcy option. Congress should "prepare a fair, orderly, predictable and lawful approach to help struggling state governments address their financial challenges without resorting to wasteful bailouts," they asserted. "This approach begins with a new chapter in the federal Bankruptcy Code that provides for voluntary bankruptcy by states, a proven option already available to all cities and towns across America."

As Bush and Gingrich pointed out, Chapter 9 of the Bankruptcy Code allows cities and other municipal entities to file for bankruptcy as long as their state permits them to do so. States, on the other hand, have no access to bankruptcy. State-bankruptcy advocates like Bush and Gingrich often call for a new "Chapter 8" to be added to the code to grant states the option of voluntarily filing for bankruptcy.

After the Bush-Gingrich column was released, it seemed that momentum for a state-bankruptcy option might be building. But the debate quickly ran into resistance from both parties. Democrats feared that states would use such an option to drastically cut pensions of public employees and disavow their collective-bargaining agreements. Bush and Gingrich did not dampen this concern; rather, they seemed to revel in the possibility. State bankruptcy, they wrote, "would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations" and "could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers." As a result, any hint of Democratic support for a state-bankruptcy option evaporated.

Republicans weren't so sure about the measure, either. Municipal-bond-market lobbyists whispered in right-leaning lawmakers' ears, insisting that state bankruptcy would be devastating for the market. "Just the availability of a bankruptcy option and the potential bond default could severely damage state credit ratings and destroy the trust of bondholders," a state comptroller wrote in a letter to the Wall Street Journal in early 2011. "Bankruptcy for states could — would cripple bond markets," another critic warned. Less than a month later, Representative Eric Cantor — then the second-ranking Republican leader in the House — announced that Congress would not be taking up any state-bankruptcy proposal. That was the end of the debate.


The irony of the objections that sank the state-bankruptcy option a decade ago — objections that continue to spur opposition to the idea now — is that they are not only mistaken, but each proves to be an argument in favor of the option rather than against it.

The concern that state bankruptcy is simply a ploy to undermine public employees by severely cutting pensions and terminating collective-bargaining agreements is in some respects understandable. Bush and Gingrich framed their call for a state-bankruptcy option in essentially these terms. Such claims are unfortunate, not least because critics often take them at face value. "State bankruptcy is a project to shift hardship onto pensioners while protecting bondholders," David Frum recently warned in the Atlantic, "and, even more than bondholders, taxpayers."

In reality, state bankruptcy is not likely to do anything of the sort. To see the error in Frum's and other critics' reasoning, we must start by considering what financial distress looks like in the current environment.

States today do not stand idly by as they tumble toward total collapse. Instead, they take steps to cut costs. Some states raise taxes, and many try to restructure their obligations to existing constituencies. The two constituencies typically hit hardest by these efforts include public employees and the recipients of state services — especially poor and lower-middle-class recipients. During the last crisis, for instance, Wisconsin and several other states cut back on collective bargaining or renegotiated their collective-bargaining agreements. Its neighbor, Illinois, slashed public services in the decade following the Great Recession: Relative to its 2000 funding levels, the state has since cut support for public universities by 48% and the number of state troopers by nearly 20%. And though the most recent budget included an increase, Illinois has also significantly decreased annual funding for its Department of Children and Family Services.

Rather than permitting states to force the burden onto one or two disfavored constituencies, bankruptcy requires that the sacrifice be borne by everyone. Creditors given collateral to secure repayment of their claims are entitled to priority, of course, but the claims of every class of general creditors — including public employees and most bondholders — can be adjusted. Many years ago, now-Senator Elizabeth Warren pointed to this feature of corporate bankruptcy: "Bankruptcy," she argued, is "a federal scheme designed to distribute the costs among those at risk." The promise of equitable treatment — that every constituency shares in the sacrifice — may not be perfectly achieved, but the distribution of the burden is far fairer in bankruptcy than it is outside of bankruptcy.

The outcomes of actual public-entity bankruptcy cases also need to be taken into account in our analysis. During the Detroit bankruptcy in 2013-2014, for instance, were pensions slashed while bondholders rejoiced? Quite the contrary: While severely underfunded pensions were subject to small adjustments — the biggest was the loss of future cost-of-living increases — pensions were otherwise protected. As it turned out, bondholders bore much more of the burden than retirees, with some receiving just 41% of their claims. Other unsecured creditors had their claims cut to 13%. In the Stockton, California, bankruptcy that same year, though retirees were forced to shift to less-generous health-care benefits, pensions were not cut at all. Indeed, the pattern that has emerged across large municipal bankruptcies undermines critics' claim that bankruptcy would be devastating for pension beneficiaries.

Republican concerns that state bankruptcy would cripple the bond markets are similarly unfounded. Ironically, this objection is often made by market enthusiasts, yet it is based on an implicit assumption that markets don't work well. If bond markets were unable to distinguish between financially sound states and states that are at risk of default, perhaps all bonds would plummet if a state-bankruptcy option were enacted. But this is contrary to everything we know about the market for state and municipal bonds (known as the "municipal-bond market," even though it includes state debt as well). Although the market for state debt is far from perfectly efficient, it does distinguish between good and bad risks. When Utah recently issued bonds, for instance, the bonds had an interest rate 0.40% above the five-year Treasury bond rate. For Illinois, which issued bonds the same week, the difference was 5.25%.

If the enactment of a state-bankruptcy option had any negative effect on bond prices, that effect would stem from the decreased likelihood of states receiving a federal bailout, since the bankruptcy option would exist as an alternative. This effect should be applauded. As work by scholars such as Stanford University's Jonathan Rodden has shown, the expectation of receiving a federal bailout gives states a powerful incentive to overspend. A state-bankruptcy option would send the opposite signal. Moreover, the impact would vary depending on the state's fiscal responsibility or lack thereof. For fiscally sound states, any impact is likely to be both small and temporary.

A final problem with the bond-market objection is that it ignores a major piece of evidence we already have: the market for cities' and other localities' bonds. Municipal-bankruptcy law has been in place since the 1930s, and municipalities such as Detroit and Stockton have declared bankruptcy in recent years. If a bankruptcy option is devastating to bond markets, we would expect the market for municipalities' bonds to have collapsed. But this has not happened.

In addition to ensuring a fairer distribution of the sacrifice and avoiding the need for federal bailouts, a state-bankruptcy option could actually help counteract a dysfunctional feature of state politics. One reason that so many states have made unsustainable pension promises is that the bargaining process is deeply flawed. The lawmakers who negotiate pensions have little incentive to strike a hard bargain with pension beneficiaries because they depend on the beneficiaries' votes for election. In some cases, in fact, lawmakers themselves are beneficiaries of the very same pension system they are responsible for managing. Nor are lawmakers required to find money in their current budgets to pay in full for the benefits, since pension benefits are paid long after the obligation is first incurred. And for decades, states have reduced the current costs of these benefits even further by adopting exaggerated estimates of the returns they will receive from investing the funds they do set aside.

Even if no state ever actually filed for bankruptcy, the existence of a state-bankruptcy option would dampen these perverse incentives, at least on the margin. The funds set aside for pension beneficiaries cannot be taken away from the beneficiaries in bankruptcy; only the unfunded promises can be adjusted. If state bankruptcy were an option, public employees and their representatives would be far more mindful of the distinction, and public employees would have a greater incentive to press for full funding of their pensions at the outset.

What's more, if a state actually did file for bankruptcy, the bankruptcy framework would enable it to adjust obligations that cannot be altered outside of the bankruptcy context. Under the Illinois state constitution, for instance, even pension benefits that have not yet accrued cannot be "impaired" in any way. The Illinois Supreme Court has construed this provision extremely broadly, striking down a 2013 law that would have made minor adjustments to the not-yet-accrued benefits of current employees. As rulings by the judges in the Detroit and Stockton bankruptcy cases made clear, a federal bankruptcy law would override any such state limitations given that, under the Supremacy Clause of the U.S. Constitution, federal law trumps any state law to the contrary, including provisions in the state constitution. A federal law would also permit the restructuring of other state obligations — none of which can ordinarily be restructured outside of bankruptcy due to the U.S. Constitution's Contracts Clause, which says that a state cannot enact legislation "impairing" any contractual obligation.

A state-bankruptcy option also would provide a clearer priority structure than existing state law. Perhaps because default has been rare in recent decades, states do not provide anything like a complete set of priorities for their obligations. Although many purport to create special priorities for some obligations — in California, for instance, the public-school system has first call on the state's revenues — even where a state does prioritize, the practical significance of those priorities is often unclear. At a time of crisis, the state could simply fail to pay, or it could subvert the priority. We have seen this happen in other countries: When Ecuador fell into distress in the 1990s, it undermined the ostensible priority of a class of sovereign bonds by targeting those bonds for restructuring first, despite having promised that they would be protected.

A bankruptcy option would add considerable clarity to the obligations picture. Bankruptcy honors contractual commitments to give one obligation priority over another. If a state has issued two classes of bonds, one of which agreed to be subordinate to the other, this contractual commitment would be enforced in bankruptcy. Bankruptcy also honors any property rights created by state law, such as interests in particular property or revenues that serve as collateral for an obligation. In the pensions context, this means unfunded pension obligations are an ordinary claim that can be restructured in bankruptcy, whereas funds that have been properly set aside are fully protected and available only to pension beneficiaries.

To be sure, bankruptcy's priority scheme does not neatly resolve every issue. The question of how to treat two key groups of creditors with the same priority — such as bondholders and pension beneficiaries — caused controversy in places like Detroit and Stockton and is now doing the same in Puerto Rico. Bankruptcy law does not ignore this issue: It prohibits unfair discrimination in favor of one type of obligation as compared to other obligations with the same priority. What is not entirely clear, however, is at what point the difference in payouts — i.e., the discrimination — is unfair. In the Detroit case, for instance, pension beneficiaries received roughly 60% of the unfunded portion of their benefits, while other general creditors received much less. Yet even with this divergence, creditors' treatment is much more predictable than it would be outside of bankruptcy.

Some critics of the state-bankruptcy option — E. J. McMahon of the Manhattan Institute most prominent among them — insist that states do not need a bankruptcy option, claiming that even the most distressed states can get by without it. If state lawmakers have the political will, the argument goes, they will work their way out of a crisis by cutting spending and raising taxes. If that is not enough, lawmakers can renegotiate existing contracts and pass legislation making it less likely that they will enter into unsustainable contracts in the future. State financial distress is primarily a political problem, McMahon argues. If states have a bankruptcy option, legislators won't work as hard to make the difficult choices necessary to relieve a state's financial distress.

This is the strongest policy objection to a state-bankruptcy option. States do in fact have much more robust tools for responding to financial distress than does an ordinary corporation or even a municipality, which has less taxing capacity than a state. Perhaps states can muddle their way through, but it is very risky to assume they will. States have defaulted in the past, and some currently face such enormous structural deficits that their political tools could prove insufficient in times of distress. Even if a deeply distressed state did eventually restore fiscal balance, the costs — such as severely cutting public services for many years — could be quite destructive.

If a state is unable to recover, not only is bankruptcy far superior to either a bailout or a massive collapse, but the threat of bankruptcy could in fact give lawmakers more leverage to make necessary adjustments outside of bankruptcy. While some worry that states would view bankruptcy as an opportunity rather than a threat — that states would file for bankruptcy even if they didn't need to — this outcome is highly unlikely. After all, no governor wants to be the leader who steered the state into bankruptcy. Given the leverage it would provide lawmakers to make necessary adjustments outside of bankruptcy and its superiority to a bailout or complete default if all else fails, providing a state-bankruptcy option is a much better strategy than assuming even the most financially distressed state will somehow make its way through.


Even for those who are persuaded of the need for a state-bankruptcy option on policy grounds, one very serious concern remains: Is state bankruptcy constitutional? Even if it is the best solution to a state's financial distress, the reasoning goes, state bankruptcy might impermissibly interfere with state sovereignty under the Tenth Amendment to the U.S. Constitution, which reserves to the states any "powers not delegated to the United States by the Constitution, nor prohibited by it to the States." Alternatively, a bankruptcy option might violate the Constitution's Contracts Clause, since it would alter existing state contracts — something the states themselves ordinarily cannot do.

These issues were hashed out for municipalities in a pair of cases that straddled the Supreme Court's famous "switch in time" — its shift from striking down to upholding New Deal legislation in the 1930s. Prior to the switch, in Ashton v. Cameron County Water Improvement District No. 1, the Court struck down the original 1934 municipal-bankruptcy law under both the Tenth Amendment and the Contracts Clause. "If obligations of states or their political subdivisions may be subjected to the interference here attempted," the majority held, "they are no longer free to manage their own affairs....And really the sovereignty of the state, so often declared necessary to the federal system, does not exist." Although the Contracts Clause limits state, not congressional, action, the majority also held that the bankruptcy statute impermissibly enabled a state to impair contracts "by granting any permission necessary to enable Congress so to do."

Two years later, the Supreme Court changed its mind, upholding a new municipal-bankruptcy framework that differed only in minor details from its ill-fated predecessor. In United States v. Bekins, the Court quoted with approval a congressional report's assurances that the framework "avoids any restriction on the powers of the States or their arms of government" and that "[n]o involuntary proceedings are allowable." "The statute is carefully drawn so as not to impinge upon the sovereignty of the State," the Court concluded, adding that such a measure is authorized by Congress's powers under the Constitution's Bankruptcy Clause.

Since the Bekins ruling over 80 years ago, the constitutionality of a municipal-bankruptcy law with the features just described has been well settled. Thus unless the Supreme Court were to overrule Bekins or conclude that states are different than municipalities for bankruptcy purposes, a state-bankruptcy law would withstand constitutional challenge.

Although municipalities are essentially creatures of the state, courts have sometimes treated them differently than states for constitutional-law purposes based on the view that municipalities are corporations created by their residents, as opposed to fully sovereign entities. For instance, the Supreme Court has long interpreted the 11th Amendment as prohibiting lawsuits against states but not against cities. Yet for the purposes of the Tenth Amendment, which poses the sovereignty issue most directly, the Court has long given cities the same treatment as states. If municipal bankruptcy is constitutional, then, state bankruptcy is likely to be constitutionally sound as well.

Some scholars do suspect that the logic underlying the constitutionality of both state and municipal bankruptcy may be shaky. Leading constitutional-law scholar Michael McConnell, for one, characterizes the Bekins Court's conclusion that enabling a state to authorize its cities to file for bankruptcy enhances rather than undermines state powers as "a quite unrealistic way of thinking about the consequences of bankruptcy." By allowing a judge to determine both whether a state is insolvent and thus can file for bankruptcy and whether the state's proposed restructuring satisfies the "best interests of creditors" standard, McConnell worries that a state-bankruptcy option "would cut deeply into the inherently sovereign powers of the state over taxation and expenditure." McConnell also notes that in the legislative history to the 1937 municipal-bankruptcy law, "the best-interest standard was defined according to two prior decisions, both based on the concept that the city had not exhausted its taxing capacity."

McConnell's criticism raises an important point: Declaring bankruptcy would in fact need to be voluntary on the part of the state, just as municipal bankruptcy is, since a federal law that purported to give creditors the right to throw a distressed state into bankruptcy would be struck down as an unconstitutional interference with state sovereignty. But McConnell's concerns assume that state bankruptcy could violate the Tenth Amendment even if the state filed for bankruptcy voluntarily and even if only the state were allowed to propose the terms of the restructuring.

McConnell is right to point out that state consent is not always enough: The Supreme Court made this much clear in National Federation of Independent Business v. Sebelius — the first Obamacare decision in 2012 — by holding that state consent is insufficient if Congress has twisted a state's arm. As Chief Justice John Roberts put it, Congress had put "a gun to the head" of the states by threatening to withhold all federal Medicaid funding from any state that did not agree to expand its Medicaid program.

Although these sorts of cases are often difficult to interpret, the Supreme Court does not seem likely to overrule Bekins and strike down state bankruptcy on commandeering grounds. Current municipal-bankruptcy law is instructive in this regard. The role of the bankruptcy judge in municipal bankruptcy is not proactive, but reactive. A judge may be able to reject a bankruptcy filing if the city is not insolvent, or decline to approve a proposed plan of adjustment if it does not satisfy the "best interests of creditors" standard, but the judge cannot force the city to raise taxes or cut spending. Perhaps more importantly, in recent cases, bankruptcy judges have not interpreted the insolvency requirement or the best-interest standard as requiring additional use of the city's taxing powers. In the Detroit case, for instance, Judge Steven Rhodes ruled that the best-interest standard is satisfied as long as creditors are likely to do better under the restructuring than they would if the city had not filed for bankruptcy. Offering states the ability to invoke this option — an option that New York Governor Andrew Cuomo recently insisted he would never use — is not "putting a gun to the head."

In fact, after voicing his concerns about the constitutionality of state bankruptcy, McConnell acknowledges that "the pragmatic perspective of the Bekins Court could still exert a pull," suggesting that a state-bankruptcy option might be upheld. He then ends on an optimistic note, concluding that if Congress took care to protect "the states' authority over taxing and spending" decisions, it "is entirely possible" state bankruptcy would be upheld. There are thus strong reasons to expect that a properly framed state-bankruptcy law would be deemed constitutional.


Creating a state-bankruptcy framework would be quite simple. Current municipal-bankruptcy law has only 20 provisions, the first of which incorporates a long list of provisions from ordinary corporate re-organization and elsewhere in the bankruptcy laws. If the state-bankruptcy framework were purely voluntary and prohibited the bankruptcy judge from interfering with political or governmental powers, as the municipal-bankruptcy option does, it should satisfy any constitutional objections. To reduce the constitutional vulnerability even further — for "avoidance of doubt," as lawyers say — Congress could explicitly preclude the bankruptcy judge from considering the extent to which the state has made use of its taxing powers when determining whether the state is insolvent and whether a proposed restructuring satisfies the best-interests-of-creditors standard.

The most important policy issue surrounding a state-bankruptcy option is whether to clarify the treatment of ordinary bondholders and unfunded pensions. Because the two groups have the same priority in bankruptcy — both are unsecured claims — the principal requirement is that neither be subject to unfair discrimination. This traditionally has been understood to mean that two classes of unsecured creditors cannot be given sharply divergent treatment, but bankruptcy judges are not given any guidance as to when the divergence becomes "unfair." In the Detroit bankruptcy, pension beneficiaries received much more than other unsecured creditors, and the divergence may be at least as significant in Puerto Rico. If lawmakers wish to reduce such divergence in future cases, they could adopt a more precise definition of unfair discrimination, defining a divergence of more than, say, 10% or 15% as presumptively unfair.

Although I advocated just such a reform after the Detroit bankruptcy, I now think lawmakers should leave unfair discrimination undefined, given the rigidity of a fixed percentage and the likelihood it either would be subverted or would produce harsh results in cases where a more substantial divergence is justified. In practice, this means pensions will not be restructured as significantly as bonds. But even a smaller restructuring of pensions could significantly improve a state's financial condition. Bankruptcy can also be used to reform the pension system by adopting stricter accounting standards or shifting to a defined-contribution plan. The plan of adjustment the oversight board is pursuing for Puerto Rico would make modest reductions to current pensions, but it would also ensure that sufficient funds are set aside to pay those pensions and complete a shift of the island's three principal pension funds to a far more sustainable defined-contribution system.

In addition to defining a new chapter of the Bankruptcy Code, Congress could provide some conditional assistance to states that pursue essential reforms. American Enterprise Institute scholar Andrew Biggs has proposed one such approach to state fiscal crises. Noting that Illinois has accrued $469 billion in unfunded pension benefits, Biggs proposes that Congress offer rescue funding for Illinois and other states but insist that the states reform their pensions in exchange for the funding. "Any state looking for a pension handout," Biggs writes, "must either live by the stricter accounting rules federal law imposes on private pension plans or freeze its pension and shift all employees to defined contribution retirement plans." The International Monetary Fund uses a similar "bailout with strings" approach when it provides rescue funding to countries in financial distress.

The conditional-rescue approach is an attractive one, and Biggs's focus on unfunded pension obligations would target the principal source of states' financial distress. Biggs proposes this idea as an alternative to state bankruptcy, but it could actually work better as an accompaniment to such an option. Given the absolute protection of state pensions in the Illinois state constitution, for instance, current employees could not be forced to accept any alteration that could reduce their pension benefits even if the state agreed. This means that any potential reduction, such as a shift to the federal treatment of failed pension plans or to defined-contribution pensions, could not be applied to current employees, only to future hires. But providing such conditional assistance in tandem with a state-bankruptcy option would remove any obstacles to applying the reforms to the benefits of current employees. If Congress passed a state-bankruptcy framework and a state did file for bankruptcy, the federal government could then provide financing with the pension-reform strings attached.


While Detroit and other large municipal-bankruptcy filings provide hints of how a state-bankruptcy framework might function in practice, the Puerto Rico experience is even more instructive. With a population of 3 million — greater than that of 18 states — along with more than $70 billion in financial debt and approximately $50 billion in unfunded pension liabilities, Puerto Rico's example is much more relevant to a state than even the largest municipal bankruptcies, like Detroit or Jefferson County, Alabama.

The Puerto Rico experience offers one encouraging lesson for those pushing for a state-bankruptcy option, and one that is less encouraging. The encouraging lesson involves the role of the federal judge. In debates over state bankruptcy, critics often worry that it would be unseemly, even if constitutional, for a single federal judge to have power over the elected officials of a state. This has not proven to be a problem in the Puerto Rico restructuring. Under the Puerto Rico Oversight, Management and Economic Stability Act of 2016, which created an oversight board and authorized it to file a bankruptcy-like restructuring proceeding on behalf of Puerto Rico, the chief justice of the Supreme Court was instructed to select a judge to oversee the case and permitted to pick any federal trial-court judge in the country. Chief Justice Roberts selected Judge Laura Taylor Swain, a judge from the Southern District of New York who had previously served as a bankruptcy judge. Judge Swain has been careful to respect the role of Puerto Rico's democratically elected officials and has applied the law as written, sometimes ruling in favor of the government and sometimes not. It has been far less awkward a process than many feared it would be.

The more sobering feature of the Puerto Rico restructuring is its messiness. The oversight board filed the restructuring petition more than three years ago — on May 3, 2017 — and it still is not clear when Puerto Rico will be ready to emerge. To be sure, a relentless stream of natural and manmade disasters — Hurricane Maria, the forced resignation of Governor Ricardo Rosselló, earthquakes, and now the coronavirus — have impeded progress. But the restructuring has been enormously complex on its own. This complexity stems in part from the oversight board's need to coordinate with Puerto Rico's democratically elected officials, since they must enact any legislation required to effectuate the restructuring.

Bankruptcy, then, is not a simple solution to the financial distress of a large public entity. But providing states such an option could be enormously helpful, both because of the benefits it would provide in the unlikely event a state actually had to file for bankruptcy and because of the leverage the threat of bankruptcy would give to state officials who need to renegotiate the state's obligations outside of bankruptcy.

The best way for Congress to help states, both with their immediate coronavirus problems and with longer-term structural issues, would be to include a state-bankruptcy framework within any pandemic-response aid package it enacts.

David Skeel is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Carey Law School and the author of, among other books, Debt’s Dominion: A History of Bankruptcy Law in America (Princeton, 2012).


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