Query to readers. Over at Slate Explainer, Christopher Beam explains that although municipalities and cities and such can go bankrupt under the Federal bankruptcy code, states are not included under Chapter 9. Right, got it. He then adds something I don’t doubt is true, but wonder if readers can point me to the relevant legal authority – the ability of the Federal government to take a state into “receivership” – something, he adds, that has never happened.
What is the legal authority for this process of Federal receivership of a state of the United States?:
Say the state can’t make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state’s debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors’ committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state’s budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)