The constitutional hurdles are very high, says this New York Times piece. And the topic is so sensitive that no one will dare put it in writing on the Hill. But it may very well come down to bailing out some states with federal money or allowing them to declare some kind of bankruptcy:
Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government's aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
And, of course, public unions are gearing up for a battle to save their gold plated pensions:
"They are readying a massive assault on us," said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. "We're taking this very seriously."
Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states' immediate budget gaps with their long-term structural deficits.
"States have adequate tools and means to meet their obligations," the report stated.
Could it happen? Bankruptcy remains a longshot given what it might do to the municipal bond market. More likely is some kind of federal bailout with strings attached. Nothing will happen until next year (fiscal year) when a lot of these temporary tax increases and spending cuts passed by the states expire.