In view of the incredible debt being carried by the State of Illinois for unfunded pensions and future retired employee health benefits, a question arises in the comment session every once in a while as to why state government doesn’t declare bankruptcy, as, for example, the City of Detroit has.
Here’s how Lakewood bond analyst Steve Willson explained the situation:
No, a state can’t go bankrupt.
Under the US Constitution, it is sovereign.
Chapter 9 bankruptcy only applies to municipalities, and states are explicitly excluded.
Further, bankruptcy is for those entities that do not have the ability to raise money in order to pay their bills, such as non home-rule units of government.
The state of Illinois has the unlimited power to raise taxes.
I’m not saying it’s good public policy, I’m saying they have the authority to do so.
It might will damage the state economically, but they would certainly be able to pay all of their bills.
Illinois is on its way to becoming the next Mississippi.