Attempting to balance crunched budgets with ballooning pension obligations, it was only a matter of time before lawmakers began discussing a bankruptcy option for States. Senator John Cornyn proposed that Congress consider the issue, and it looks like nothing but bad news for municipal bond investors as well as pensioners. Get the full story, with pictures and video below!

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Considered sovereign by the U.S. Constitution, States are not afforded the ability to escape or renegotiate debt obligations. This fact essentially guarantees payment of debt, and is the reason municipal bonds are so popular, as well as public jobs that come with a pension. Now, all of a sudden, those guarantees are not so certain.

For states like California or Illinois, a bankruptcy option might seem like an attractive solution to the current budget crisis. As it stands, a lot of states are siphoning money from essential public services to fund pension programs, but this solution is only short-term. Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees, says he fears what will happen when this is no longer an option.

“They are readying a massive assault on us. We’re taking this very seriously.”

Still, some lawmakers argue that a Chapter 9 option for states would not prove to have many takers. Aside from the obvious stigma of declaring Chapter 9, any taker would no longer be able to issue debt via the capital markets. This is an essential function for major infrastructure projects and budget gap filling.

Still, it’s clear that something will have to be done to assist some of the more dire situations. Comparing some states to G.M., proponents argue that a rapid loan from the Government would help generate revenues and avoid costly penalty payments on debt. After all, it takes money to make money. But it seems the government is less than ready to dole out cash to any takers at this time.

“Now Congress is much more conservative,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”

What do you think of the proposal to give states a bankruptcy option? Would Congress pass a bill to this effect? Let me know your thoughts in the comment section. And don’t miss the pictures and video on the story below!

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Photos: Devorah