State bankruptcy law may be in the works

WASHINGTON, Jan. 21 (UPI) -- Washington lawmakers are working behind the scenes to develop a way to let states declare bankruptcy and get out from under large debts, political insiders say.

Municipalities can declare bankruptcy protection, but states cannot.

Bankruptcy lawyers consulted by congressional aides said some members of Congress fear it is only a matter of time before a state seeks a bailout, The New York Times reported Thursday.

Bankruptcy could also allow a state to alter contractual promises to retirees and could provide an alternative to a no-strings bailout, the newspaper said.

Besides potentially hurting retirees, bankruptcy for states could damage bond markets, the Times said.

"All of a sudden, there's a whole new risk factor," said Paul S. Maco, who was head of the U.S. Securities and Exchange Commission's Office of Municipal Securities during the Clinton administration.

No potential state bankruptcy bill has been formulated and no members of Congress have come forward as a sponsor, but Sen. John Cornyn, R-Texas, raised the idea with Federal Reserve Chairman Ben Bernanke at a hearing this month, the Times said.

Critics of a state bankruptcy law say it could give governors and others more leverage in bargaining with unionized public workers.

"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."