Politics

Why states can't go bankrupt

VIDEO16:4916:49
Here's why politicians are urging U.S. states to go bankrupt

Senate Majority Leader Mitch McConnell's comments suggesting he would let states go bankrupt ignited a firestorm of controversy.

The coronavirus pandemic has wrought havoc on state economies, draining states of needed revenue from sales and income taxes.

Legal experts say states are not permitted to file for bankruptcy, but there has been a push in the past to give states a path to it if they find themselves in financial trouble.

Some states, such as Illinois, are in particularly bad shape, but none of the research from the three major credit agencies indicates states are anywhere near danger of defaulting on their debt obligations.

States tend to have a great deal of financial flexibility — they can raise taxes, cut spending, push some problems down to local governments, and issue debt. Primarily because of this, states tend to have pretty high credit ratings.

Many states built up pretty substantial cash reserves during the economic recovery that followed the 2008 financial crisis, when they were faced with severe budget challenges.

However, credit agencies are keeping a close eye on the situation, and some red flags have popped up around the country.

Bankruptcy might not be a concern, but states will likely be cash-strapped for years to come.

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