How to file for bankruptcy in Illinois

USA: State bankruptcy as a last resort

Many states are heavily indebted and, like Greece, are facing the financial abyss. The Republicans are now considering giving them bankruptcy. So they could shrink to health.

Washington. Newt Gingrich has an original mind, sparkling with ideas and plans, which sometimes overshoot the mark. In the mid-1990s, as Speaker of the House of Representatives, he was preparing to instigate a Republican “revolution” in Washington and to chase Bill Clinton out of the White House in the wake of the Lewinsky affair. Now he is in the process of launching a presidential candidacy himself.

But before that, the 67-year-old let a political balloon rise, which irritated at least some of his party friends and met with sheer rejection in the Democratic camp. His mind game is essentially this: Why should California or Illinois be prohibited by law, which GM or Chrysler saved from doom a year and a half ago? So why shouldn't the chronically loss-making US states take the path to bankruptcy so that they can emerge from it slimmed down and with fresh vigor? Municipalities and counties, so the argument goes, the way out into bankruptcy is ultimately also open. The Americans abhor the alternative of an emergency aid package that the federal government sent to the Wall Street banks. “We have to be able to say no,” emphasizes Gingrich.


California cancels company cell phones

What seems like an act of desperation has its logic. Via the detour of an orderly insolvency procedure, the states would be given the opportunity to reduce inflated legacy burdens such as personnel costs, renegotiate public service contracts and thus relieve the pension funds. Above all, the reserves for the pension funds and the galloping expenses for the medical care of civil servants make the governors sweat with fear.

Adjusting the status quo would, however, challenge the strong unions as representatives of the interests of teachers and civil servants. For most of the states, the economic outlook is grim. As part of the expiring economic stimulus program, Washington has pumped 170 billion dollars into the states between Alaska and Florida. The economic crisis caused social benefits to swell, and tax revenues are nowhere near gushing into the empty coffers as desired. The Center on Budget and Policy Priorities identified a gap of $ 125 billion across all states.

In California, the new Governor Jerry Brown has just almost routinely declared a state of financial emergency. This year there is a gap of 25 billion dollars in the budget. As an immediate measure, he canceled all company cell phones.

As in the "Golden State" elsewhere, health and social programs are also being trimmed. Illinois has just increased the comparatively low income tax from three to five percent. Because that is far from being enough, Barack Obama's home state also took out a loan of 7.3 billion dollars to secure its reserves. The deficit is 15 billion and bills of 8.5 billion are outstanding.


Divided Republicans

The Republicans, however, are divided on the matter. While many senators can appreciate the Gingrich idea, Eric Cantor, number two in the House of Representatives, has already given up. The legal situation offers enough leverage to put the states groaning under financial difficulties under pressure. In addition, the states themselves have sufficient instruments at their disposal.

The demand, supported by the radical Tea Party movement, provoked opposition not only in politics, but also in the financial world. The US rating agency Standard & Poor's is firmly against the option of bankruptcy. Just talking about a state bankruptcy would shake investor confidence and panic the investment market. As a compromise, a supervisory authority for indebted states comes into question. A similar body maneuvered the metropolis of New York out of ruin in 1975.

At a glance

Newt Gingrich, once powerful Speaker of the House of Representatives, suggests enabling states to go bankrupt like companies. This would allow them to renegotiate expensive public service contracts, among other things. The idea meets with divided reactions.

("Die Presse", print edition, January 29, 2011)