January 24, 2011 / 7:32 PM / 9 years ago

House leader opposes bankruptcy for states

WASHINGTON (Reuters) -House of Representatives Majority Leader Eric Cantor on Monday dismissed the idea that states should be allowed to declare bankruptcy, diminishing the possibility that any legislation opening bankruptcy courts to the states will work its way through Congress.

Representative Eric Cantor delivers remarks during the 2010 meeting of the Wall Street Journal CEO Council in Washington, November 16, 2010. REUTERS/Jonathan Ernst

Cantor, speaking to reporters, was reacting to reports last week that some fellow Republican members of Congress were preparing legislation to allow cash-strapped states to declare bankruptcy as an alternative to turning to the federal government for help with their shaky financial situations.

Bankruptcy would also give states an opportunity to renegotiate contracts with public employee unions.

Cantor, who also opposed any federal bailouts, said states do not need to resort to bankruptcy filings — something they are now prohibited from doing because they are considered sovereign in the U.S. Constitution .

“I don’t think that that is necessary because state governments have at their disposal the requisite tools to address their fiscal ills,” Cantor said.

“They’ve got the ability to enter into new negotiations if there are any collective bargaining agreements in place. They’ve got the ability to adjust levels of spending as well as revenues at the state level,” he said.

The rebuff by Cantor, one of the most powerful leaders in Congress, along with an outpouring of criticism from states, economists, and investors in the $2.8 trillion municipal bond market, decreased the chances of any bankruptcy bill introduced in the House becoming law.

The municipal bond market, which has recently been rocked by fears of possible defaults, could suffer another blow, driving up borrowing costs further, if the legislation gained traction.

The idea is “clearly not beneficial to an already fragile municipal market,” said Chris Mauro, municipal strategist for RBC Capital Markets, in a statement.

Last week, Newt Gingrich, the former House Speaker who remains a powerful Republican party figure, told Reuters that legislation was being prepared in Congress to let states declare bankruptcy. Gingrich, a potential 2012 presidential candidate, has been talking up the idea in recent months.

BANKRUPTCY POWER WOULD CARRY BIG COSTS

States, even those with yawning budget problems, flatly rejected the suggestion of bankruptcy protection.

California Treasurer Bill Lockyer told Reuters Insider on Monday that states may not need the same freedom to declare bankruptcy as major companies because they have a guaranteed source of revenue.

“The major difference, of course, is that we’re looking at sovereign governments that have the ability to enact a tax, and that’s not the case of these private corporations that may have unfunded obligations that they can’t deal with,” he said.

Lockyer, who last week told Reuters that California had no interest in using bankruptcy to solve its own fiscal problems, said that even the potential of bankruptcy legislation could disrupt states’ abilities to borrow.

Mauro, of RBC Capital Markets, also warned of the cost consequences of bankruptcy legislation.

“If the current discussions in Washington move out of the conceptual stage, the result could be a repricing of the state general obligation market, forcing yields higher,” he said.

After Republicans swept November’s mid-term elections and took control of the U.S. House of Representatives on promises of cutting spending, the party’s leaders became apprehensive about states’ shaky financial conditions.

The longest and deepest recession since the Great Depression caused a revenue collapse in most states, forcing them to cut spending, lay off workers, borrow heavily and turn to the federal government for assistance.

Many states have yet to recover, and Republicans worry they may ask for a repeat of the extraordinary assistance included in the $814 billion economic stimulus plan — the largest transfer of federal funds to states in U.S. history.

“There will be no bailout of the states, the states can deal with this and have the ability to do so on their own,” Cantor said.

Other Republicans are also taking a “tough love” approach. Last week, Representative Randy Neugebauer introduced legislation to prevent the Federal Reserve from buying short-term municipal debt. By purchasing the notes, the Fed would effectively lend states cash.

Federal Reserve Chairman Ben Bernanke has repeatedly resisted calls to buy the debt.

Lockyer posited the bankruptcy bill was a swipe at public employees because if a state declared bankruptcy, it could renegotiate labor contracts with its employees.

Additional reporting by Richard Cowan and Lisa Lambert in Washington, D.C., and Rhonda Schaffler in New York; Editing by Leslie Adler

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