It’s a solution of apparent Alexandrian elegance and simplicity: Empower America’s cash-strapped states to slice cleanly through a strangling knot of debilitating debt and government union cronyism by letting them file for bankruptcy. Long-term liabilities could be restructured, unaffordable labor contracts rewritten, fiscal health restored. No federal bailouts necessary.
This intriguing idea quickened last November when former House speaker Newt Gingrich gave it an animating shoutout during a speech at a Dallas think tank. That was followed by a detailed explanation in this magazine by David Skeel, a corporate law professor and bankruptcy expert at the University of Pennsylvania (“Give States a Way to Go Bankrupt,” November 29, 2010). As conservative Republicans on Capitol Hill began cooking up legislation to change the federal bankruptcy code, the concept exploded across the Internet—not to mention in Wall Street research departments.
Liberal bloggers, in particular, seemed to perceive the danger to a status quo where Big Labor elects state and local legislators who then return the favor by agreeing to contracts that, say, allow police officers to retire at age 50 with pensions equal to 90 percent of their highest salary. It’s a system that’s made government unions crazy powerful within the Democratic party while also helping states rack up some $3.5 trillion in unfunded pension and health care liabilities. (And that’s in addition to the anticipated $250 billion shortfall in state budgets over the next two years.) Kevin Drum of Mother Jones put it this way: State bankruptcy “promises to become a pretty serious battle. For Republicans it’s got everything: The tea parties will love it, it provides an alternative to raising taxes, and ... it helps defund a key Democratic interest group. What’s not to like?”
Surprisingly, quite a bit—at least among some Republicans and conservatives. In a January 24 session with reporters, House majority leader Eric Cantor brushed off the idea. “I don’t think [permitting states to declare bankruptcy] is necessary because state governments have at their disposal the requisite tools to address their fiscal ills.” The Virginia Republican added, “They have the ability to enter into new negotiations if there are any collective bargaining agreements in place. They have the ability to adjust levels of spending as well as revenues at the state level.”
A more pointed critique was offered by members of the highly respected free-market Manhattan Institute, Nicole Gelinas and E. J. McMahon, in the op-ed pages of the Wall Street Journal and other papers. Among their many objections to state bankruptcy: It would violate the constitutions of many states; it would damage the balance sheets of banks holding a quarter of a trillion dollars in state and municipal bonds; it might even cause such investor panic as to risk repeating the 2008 financial meltdown. “Bond-market brinkmanship and bankruptcy threats can’t save the states from themselves,” Gelinas wrote in the Boston Globe on January 23.
Obama to propose relief for states burdened by debt from unemployment benefits - Lori Montgomery and Brady Dennis
In recent years, states have been raising taxes, cutting services and firing workers in an effort to close record budget gaps opened by the recession. With the U.S. unemployment rate stuck at 9 percent or higher for nearly two years, 30 states - including California, Michigan and Nevada - have drained their unemployment insurance funds, forcing them to borrow to pay benefits to jobless workers.
