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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