It’s no secret that some pretty large states have some pretty large deficits, and unlike the federal government, states actually have to borrow (bonds and loans) from the open market to meet revenue shortages; they can’t simply replicate the Federal Reserve and increase the money supply (i.e., the actual method of “printing money”). It’s also no big secret that the biggest liability most these states (and many of the municipalities within them) carry are pension obligations under structures created and committed a long time ago in better times by politicians often seeking governmental union support, benefits that have long been vested, many with cost of living escalators. Within U.S. Constitutional limits, states are considered sovereign – hence existing federal bankruptcy laws (notably Chapter 9 of the bankruptcy code) simply do not have any provisions for states to file bankruptcy; federal law stops at the municipal level.
A tiny, little article (“Give States a Way to Go Bankrupt”), written for The Weekly Standard back on November 29th by University of Pennsylvania law professor, David Skeel, has exploded across the Web… and into the chambers of Congress itself. Skeel addressed whether federal bankruptcy for states could even pass the sovereignty requirements accorded states by the Constitution: “The main objection to bankruptcy for states is that it would interfere with state sovereignty—the Constitution’s protections against federal meddling in state affairs. The best known such barrier is the Tenth Amendment, but the structure of the Constitution as a whole is designed to give the states a great deal of independence. This concern is easily addressed. So long as a state can’t be thrown into bankruptcy against its will, and bankruptcy doesn’t usurp state lawmaking powers, bankruptcy-for-states can easily be squared with the Constitution.”
Skeel goes on to say that, during the Great Depression, when the Supreme Court examined the issue of whether even municipal bankruptcy was constitutional (after it has struck down an earlier version, which usurped too many state prerogatives), it laid the groundwork for the possibility of a bigger financial provision to embrace states: “Because the law was ‘carefully drawn so as not to impinge upon the sovereignty of the State,’ the Court concluded, and made sure that the state ‘retains control of its fiscal affairs,’ it now passed constitutional muster.”
Shouldn’t states have the have options that we accorded General Motors and Chrysler? Shouldn’t they be able to restructure their way out of collective bargaining agreements and pension burdens that literally consume so much cash for past employees that states are not able to provide or maintain vital current services? Are government pensioners in a sacrosanct category where ordinary workers in the private sector are not? Some say many government workers opted for job and pension security, even early retirement, in exchange for lower pay during their working lives. In today’s market, it’s hard to claim that government workers are underpaid, but back when they took those jobs… maybe. Still if we are dismantling our educational systems and cutting back on public safety, necessities for the future and the present, perhaps something has to give.
Let’s face it; some states, like California and Illinois, are in debt so deep that there really isn’t an exit strategy unless those pension and union obligations can be altered… altered big time. The alternative is a massive federal bailout to maintain these states, and that will happen whether we like it or not… unless we give states some new tools to deal with their vested obligations. But even the hint of such a huge change in our bankruptcy laws has already put some downward pressure on municipal bonds:“Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow…
“For now, the fear of destabilizing the municipal bond market with the words ‘state bankruptcy’ has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possibility in a hearing this month.” New York Times, January 20th. Even if a state did not avail itself of actual bankruptcy under any semblance of a new statute, wouldn’t the mere existence of such a law encourage stakeholders, unions and pensioners in particular, to come to the bargaining table to discuss reality? And the state retirement plans were born in the days of the “defined benefit plan” (where a fixed level of monthly compensation, sometime with COL escalators, is paid), while most of us – where we even have such plans – are stuck with the new and less-predictable “defined contribution” plans (where you get a fixed pile of cash on retirement, and it’s up to you how to live on that sum).
Skeel makes a compelling closing argument for this novel approach: “This brings us back to the issue of federal bailouts. When taxpayer-funded bailouts are inserted into the equation, the case for a new bankruptcy chapter becomes overwhelming. And it’s a case for Congress to move now on the creation of a state bankruptcy law… The appeal of bankruptcy-for-states is that it would give the federal government a compelling reason to resist the bailout urge. President Obama is no doubt grateful to California for bucking the national trend in the election this month, but even he might resist bailing the state out if there were a credible, less costly, and more effective alternative. That’s what bankruptcy would offer.” The Weekly Standard. Raise taxes to new unprecedented levels to pay our retirees, some of whom leave their jobs with full benefits in their 50s after fewer than 30 years on the job? Or we can sit back and watch the sun set on states that are no longer able to function in the here and now. Or….. ???? Hey, got a better idea? Let’s hear it!
I’m Peter Dekom, and we really do need to figure out how to live in this newly reset world.
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