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Big companies such as General Motors and Washington Mutual file for bankruptcy. Some cities do, too. And last year 1.5 million Americans did it.

But U.S. states aren't allowed. But a few policymakers and pundits are debating whether it's time to give states a court-sanctioned way to shed their debts.

The idea galls critics. "Baloney" is what California Treasurer Bill Lockyer calls it, saying his state, which is already weighing painful tax hikes and spending cuts, doesn't need the option.

It seems clear that some states can't afford their long-term promises to pay for pensions and retiree health care. Those swelling costs could force them to raise taxes and slash services such as public transportation.

But is bankruptcy the right solution?

In bankruptcy court, a judge could force lenders and public workers to accept less than they are owed. Debt could drop overnight. Existing union contracts could be replaced with cheaper ones. In theory, states could regain their financial health.

But the risks are high. A state could be tied up in court for years as various sides squabble over a deal that might bring only scant relief in the end. Even discussing the idea could spook investors and rattle states' fragile finances. States need investors to buy their bonds, and demand was already dropping before talk of a bankruptcy option spread.

Fearing that towns and cities may default, investors in November and December pulled a record $21 billion from funds that invest in municipal bonds — twice as much as they did at the depths of the 2008 credit crisis, the Investment Company Institute said. Those still buying are demanding higher interest payments to compensate for the risk.

Standard & Poor's, which determines how credit-worthy states are and assigns ratings, said last week that a bankruptcy law would cause it to review the way it judges states. Downgrades would force them to pay higher interest rates.

If investors started selling the bonds, that would force interest rates higher, too, adding to the cost of financing the bonds. "The higher the interest rate, the more potholes that can't be filled," said Marilyn Cohen, of Envision Capital, a company that invests in bonds. "There's a whole chain reaction."

Some also question whether allowing states to go bankrupt would be a wise economic policy in the long run. When a company or family cuts its debt through bankruptcy, it risks encouraging others to do the same, noted Dean Maki, chief U.S. economist at Barclays Capital. With states, the danger is greater.

"There's only 50 of them, so if you allow one to file, people will say, 'Why does that state get to escape their debt and not others?'" Maki said.

Bankruptcy talk may already be taking a toll on public finances. Matt Fabian, of Municipal Market Advisors, says states, cities and towns are avoiding issuing new debt, partly because they fear a bankruptcy option.

States' combined deficits for next fiscal year are a projected $125 billion, said Iris Lav, of the Center on Budget and Policy Priorities. And they haven't put enough money away to cover pensions due in coming decades. Estimates for the collective pension shortfall range from $500 billion to $3 trillion.

State tax revenues are starting to recover as the economy improves and as states raise taxes. Revenue rose 6.9 percent in the October-December quarter, based on early data from 41 states, according to a report from the Nelson A. Rockefeller Institute released Tuesday. That would be the fastest increase in more than four years.

Still, most states face brutal budget squeezes. Tax revenue remains just below pre-recession levels, the report said. A few states have moved to fix their finances. Lawmakers in Illinois, for instance, voted to raise personal income tax 66 percent, along with spending cuts. The state still faces a$15 billion deficit.

Unlike the federal government, every state except Vermont has a legal requirement to balance its budget, according to the National Conference of State Legislatures. So when tax collections fall or spending spikes, states must find the money elsewhere. That's why so many have cut basic services.