Federalist Society Expert: Bankruptcy for States ‘Would Finish Off What’s Left of Federalism’

Allowing states to declare bankruptcy would end federalism and convert states into wards of the federal government, claimed John Baker, professor emeritus of law at Louisiana State University and Federalist Society contributor, offering his analysis on Friday’s edition of SiriusXM’s Breitbart News Daily with host Alex Marlow.

On Wednesday, Senate Majority Leader Mitch McConnell (R-KY) expressed support for allowing states to use bankruptcy to discharge certain liabilities. “I would certainly be in favor of allowing states to use the bankruptcy route,” he said. “It saves some cities, and there’s no good reason for it not to be available.”

“[Mitch McConnell] is suggesting amending the bankruptcy code to allow states to go into bankruptcy court and go through a process the way that cities and other municipalities are able to do under a chapter of the bankruptcy code,” said Baker. “There are good reasons why states cannot do this and should not ever be able to do it.”

Baker continued, “States have residual sovereignty. Like the federal government, neither can be sued without their consent. That’s the nature of sovereignty. This proposal, if ever enacted, would finish off what’s left of federalism.”

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States should not be likened to cities in terms of bankruptcy, explained Baker.

“Cities are creatures of the state,” Baker noted. “They are controlled by the state. They have no sovereignty. If you put states in bankruptcy, basically they are wards of the federal government. Now, under the Spending Clause, they’re pretty close to that anyway, but this would finish it off, and they would become nothing more than districts of the federal government.”

States would become subjects of the federal government if allowed to declare bankruptcy, just as regional areas in France are “subordinates to the sovereign in Paris,” Baker added.

A “structural understanding” of the Constitution is absent among “most Americans, including most lawyers,” remarked Baker.

Baker continued, “They’ve never studied the Federalist Papers or anything else. So when somebody comes up with an idea that sounds like a quick fix and there is — they think — precedent about it — that is cities — they don’t go into a deep dive or [ask], ‘What does this mean?’, and it means controlling the states.”

“The choice is not simply bankruptcy or bailout,” Baker stated. “There are other choices. We have had states in the 19th century that defaulted on their obligations. The state of Mississippi, and other states, have not paid off debts from the 19th century, but 20 years ago, Mississippi was shocked when it went into the international market to borrow some money to find out that the London bondholders still had them on a blacklist, and they couldn’t borrow money in the international markets.”

Baker went on,”California and Illinois need to be treated like the third-world countries that they are.”

“Third-world states” should be treated “like Argentina,” advised Baker. He reflected on Argentina’s 2001 defaulting on its sovereign debt as a guide for how to proceed with states seeking an escape from their liabilities.

Baker said, “[Argentina] could not get any more money, and so what it had to do was go into the international market and borrow and waive its sovereign immunity, which meant it could be sued. Argentina refused to pay the bondholders, and a very astute set of investors bought up those bonds at a very low amount, and then they sued Argentina. Argentina claimed sovereign immunity, but they had waived it. States do waive sovereign immunity for certain purposes.”

Baker went on, “We should make [states] waive their sovereign immunity — not us as a country — but put them in a position where in order to get funding they have to waive their immunity so that they become subject to suit — and not suit in California or Illinois courts — in a federal court in another state. That way the bondholders would impose a discipline that neither the politicians in the particular states, nor even in Congress, are willing to impose. That’s the problem.”

Baker concluded, “It’s what has been the case in the past. If you want money, you’re going to have to waive your sovereign immunity.”

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