Council of State Governments.  August 2016

"Why can’t states use the federal bankruptcy system to reorganize their debt?

The federal bankruptcy code does not allow—and has never allowed—state governments to declare bankruptcy. Since 1937, the bankruptcy code has allowed ‘municipalities’ to declare bankruptcy. The term ‘municipality’ is defined in the bankruptcy code as a ‘political subdivision or public agency or instrumentality of a state.’ This definition is broad enough to include cities, counties, townships, school districts and public improvement districts.

U.S. Constitution. The contracts clause of the U.S. Constitution prohibits state governments from ‘impairing the obligation of contracts.’ This clause prohibited state legislatures from passing any laws to relieve either private debt or the state government's own debt. 

SCOTUS ‘a state cannot refuse to meet its legitimate financial obligations simply because it would prefer to spend the money (on something else.)’'