Lawmakers Seek to Save States from Debt

Lawmakers in Washington are quietly considering letting debt-burdened states declare bankruptcy to get them on a path to solvency. Unlike cities, states are viewed as sovereign, and are prohibited from seeking bankruptcy protection in federal court. But politicians and economists think adjusting the rules—letting debt-ridden states like Illinois operate on a plan similar to what General Motors did after its federal bailout—might help states get out from under the burden of insolvent pension funds for government employees. Worries about destabilizing municipal bonds with talk of "state bankruptcy," Congress has been moving forward quietly, though Sen. John Cornyn (R-Tex.) has asked Federal Reserve Chairman Ben Bernanke to hold a hearing on the matter.