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The Spectacle Blog
Yesterday the New York Times published a story on members of Congress looking into the viability of an option for states to declare bankruptcy. Since states are sovereign, creating a law providing for state bankruptcy would be difficult, but not impossible. At heart the idea is providing a way for states to correct the structural problems they’re facing, which are the long-term costs of public sector worker pensions and benefits. If states could restructure the massive unfunded debts to public workers, they would drastically improve their fiscal situations.
The Times — and Jim Pethokoukis, who can rightly claim that he had this story six weeks ago — explain that there would be a number of glaring problems with allowing banks to declare bankruptcy, including that a bankrupt state would have difficulty issuing debt post-bankruptcy and that merely introducing the option for bankruptcy could spook bond buyers and immediately make conditions tougher for states.
For these and many other reasons it would be far better for the states to meet their obligations instead of going bankrupt. The usefulness of state bankruptcies would be not in allowing states to renege on promises they’ve made, but in providing governors with a powerful tool for bargaining with public sector unions, starting right now. Currently, unions have the upper hand in bargaining with states because the only two options for a state that can’t meet its obligations are default or a federal bailout. Since governors would do almost anything to prevent default and bailouts will likely always be forthcoming — likely in the form of “stimulus ” — they have few incentives to drive the much-needed hard bargains with state workers.
In a lot of ways the GOP’s 2010 adoption of Greece as the example of the result of fiscal irresponsibility was driven by its rhetorical expedience. BuThe sight of Greece’s unionized public sector workers holding out long after their demands crippled their country and threatened a continent, though, may have led Republicans to think about that country’s experience in a non-opportunistic way. Certainly the example is relevant for Republican governors like Chris Christie. Although Christie was able to push through a leaner budget his first year, he failed to make progress on reforming the states’ pension plan, putting off that fight for another day. And the state now faces $53.9 billion in unfunded liabilities. New Jersey’s entire 2011 budget was only just under $30 billion. Governors facing such huge structural deficits need all the tools they can get.
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More Blog Posts by Joseph Lawler
http://spectator.org/blog/2011/01/21/state-bankruptcy-makes-the-big
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Wayne | 1.21.11 @ 1:30PM
Well I assume it wasn't legal for the USSR to go bankrupt either, but it collapsed none the less. States that can't meet their bills will eventually collapse. There will be no one working in that back office to send out the checks. Laws do not trump economics.
Curly Smith| 1.21.11 @ 1:34PM
Hasn't a bankrupt State ceded its sovereignty? A State that owes its existence to outside parties cannot exercise independent power and thus can't be sovereign. By declaring bankruptcy the State is admitting that its actions are subject to the approval of the debt holders.
On the other hand, if the State is indeed sovereign then default, where the State says "you have no claim on my assets", is the only option.
Steve in Pittsburgh| 1.21.11 @ 1:35PM
The state union employees are saying to the rest of us "F off". I say we say the same thin back to them and let the states go bankrupt.
Too Many Tims| 1.21.11 @ 1:42PM
Is such a law being contemplated for municipalities as well?
Interested Conservative| 1.21.11 @ 5:20PM
TMT - It already exists - Chapter 9 of the Bankruptcy Code. It works, I played a very small role in the Orange County, Ca case, and a few other much smaller localities.
As I recall, the legal problem with states is constitutional - as the states are co-equal sovereigns to the US/federal govt.. Localities are creatures of state law, much like other such creatures such as corporations, partners, etc...
David W| 1.21.11 @ 1:58PM
given the union's propensity for unruliness will the threat of bankruptcy cause them to behave in a Grecian-like manner?
I can't begin to imagine the threats the union leaders will be making if a governor or state representative supports bankruptcy. The left will really come out of the woodwork (I've read that the left is already planning violent protests to prevent any rational thinking on the part of government to solve their self-problems).
martin j smith| 1.21.11 @ 2:18PM
The conservatives in congress must aggressively call out major unions for their selfishness and if "shared sacrifice" is the order of the day--in what was is the SEIU sharing in this sacrifice ?
Pete| 1.21.11 @ 2:28PM
Yes, we must all do our part, except for unions who donate heavily to Democrats and coerce their members to vote that way. You'd think they would all be satisfied after their windfall "stimulus" payments and Osamacare exemptions, but they want more. They are greedier than any wall st "fat-cats."
LiveFreeOrDie| 1.21.11 @ 2:51PM
States filing bankruptcy would be the beginning of economic collapse. It's stupid to even talk about it. So why are people talking about it? Another clever idea, i.e. bailout, to avoid the real problem of over spending, corruption and waste by our elite, ruling class.
Bill Hussein O'Stalin| 1.21.11 @ 2:59PM
Isn't there a federal pension guaranty fund (PBGC)? Let the public sector employees get screwed like everyone in the private sector that ended up there after their companies defaulted. What's the difference between a state and a corporation?
Oldefarte| 1.21.11 @ 3:02PM
Although I wholeheartedly agree with the idea of states being allowed to declare bankruptcy, another possible solution to this governmental unionization problem could be effected by each state's voters simply to vote for and to elect REPUBLICANS. The Democratic Party has become a political party of liberal persuasion and domination, which results in providing more governmental welfare benefits at their taxpayers' expense. Republican legislators would be managed by conservative Republican agendas and political platforms, and would be better abled to institute governmental downsizing through budget expense reduction. Everyone should simply vote for their entire Republican voting ticket at the polls to eventually eliminate this governmental unionized problem!!!!!!!!!
Rose | 1.22.11 @ 1:52AM
I cannot believe your stupidity. Why don't the Republicans do their part and give up their "Bailout" (tax cuts to the wealthy). Seems to me that all you poor sob's want is your money and to hell with anyone wlse. You will have to account for GOD in the final days. Go ahead you greedy sob's...want a civil war? You will have it. Who is giving the middle class a bailout? Maybe if the GOP doesn't want to pay taxes, maybe it is time for a REAL TEA PARTY. I'm tired of supporting people like you who don't pay taxes to start with. Ignorant!!! When push comes to shove, all you know if push blindly. See where we are after 8 years of failed policy we are still dealing with...remember the wealthy tax cuts for those years??? It is no wonder the country is in such bad shape. Thank you President OBama. When the middle class can't keep one home and yet you with your tax cuts get to keep several homes tax free as a "business expense"...shame on you. Equality will reign, one way or the other. Maybe all the "Lock and Load" I heard from Republicans in the trenches, is only the beginning. Should be careful what you wish for.
Bob K.| 1.21.11 @ 6:40PM
As Thomas Sowell recently observed, the public doesn't care about retired firemen, police, teachers and other retired government employees.
The public is concerned with those government employees currently involved in ensuring that government is supplying the services that makes our country livable.
When push comes to shove they will vote accordingly and the political class realizes it. Which is why there won't be bankruptcy.
Politicians will do what is political and adjust these pensions downward or in some cases even renege on them. The Unions will represent the active members who pay dues and will forget about the retirees who don't pay dues.
They both are nothing if not practical!