James Pethokoukis

Politics and policy from inside Washington

Secret GOP plan: Push states to declare bankruptcy and smash unions

December 7, 2010

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program.  BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31.  And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds

Greater transparency on these obligations can’t be bad. In fact, the federal government itself would do well to report deficit numbers not just on the current cash-in, cash-out basis but also incorporating the underfunding of promised pension and healthcare benefits to retirees.

But it’s about more than just openness. Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Indeed, legislation  amending federal bankruptcy law is currently being prepared by congressional Republicans. Local municipalities do declare bankruptcy from time to time, most famously California’s Orange County in 1994. But states can’t. Allowing them the same ability to renegotiate obligations could enable them to slash public employees’ lavish benefits, a big factor in their financial woes. In a recent issue of the The Weekly Standard, bankruptcy expert David Skeel of the University of Pennsylvania walks through the implications:

With liquidation off the table, the effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. Ideally, bondholders would vote to approve a restructuring. But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be “crammed down” over their objections under certain circumstances. This eliminates the hold-out problem—the refusal of a minority of bondholders to agree to the terms of a restructuring—that can foil efforts to restructure outside of bankruptcy.

The bankruptcy law should give debtor states even more power to rewrite union contracts, if the court approves. Interestingly, it is easier to renegotiate a burdensome union contract in municipal bankruptcy than in a corporate bankruptcy. Vallejo has used this power in its bankruptcy case, which was filed in 2008. It is possible that a state could even renegotiate existing pension benefits in bankruptcy, although this is much less clear and less likely than the power to renegotiate an ongoing contract.

It wouldn’t be easy to change the law. Public employee unions have traditionally carried great influence with Democrats, even if President Barack Obama’s willingness to freeze their pay on the federal level suggests their clout may be waning.  From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group. For the GOP, it’s an economic and political win.

Comments

Smashing Unions? Bankrupting CA? You make that sound like a bad thing! The Teamsters and guys like incoming Gov. Moonbeam have driven the Golden State right into the ground. Ken Dart is going to move his yacht from Cayman Islands to right off of Malibu, buy all of CA’s debt for pennies on the dollar, then treat Jerry Brown like he treats Charles Taylor of Liberia.

Posted by hurricane567 | Report as abusive
 

Wow! Good luck to the GOP if they can pull it off. And if they do, then export the idea to Canada. The allegedly ‘hard-working’ public sector workers here – federal, provincial and especially the teachers and hospital workers – could use a kick in the behind. And big cuts to their absurd entitlements.

Posted by Gotthardbahn | Report as abusive
 

There needs to be much more transparency of State/Muni pension plans. Using 7.5-8.5% discount rate assumptions in the Pension Benefit Obligation is like praying for significant inflation in the US. The current long term AA corporate bond yield is 5.2%. The 30 year US Treasury is 4.4%. Just find a conservative long term yield that an investor could buy a large annuity from Berkshire Hathaway today. When talking about worker retirement plans there is NO REASON to get aggressive on the Discount Rate assumption. And as you note, unfortunately when you pick a conservative rate, many states are 3-5x more underfunded than they thought.

So what can be done? Raise taxes significantly, cut benefits significantly and borrow from the Federal government. Most taxpayers and pension plan members do not want either of these options. Another option would be to eliminate the US corporate income tax which would create millions of jobs in the US and have the equally important benefit of increasing the funding level of the pension plans as US equity prices appreciate 25%+. With a rising US economy and stronger US stock and bond prices, pension plans then can decide if they want to convert to DC plans or to change some of the long term assumptions. http://www.eliminatecorporateincometax.c om

Posted by eliminateCIT | Report as abusive
 

Looks like we’re in wage deflation. Too bad wages have fallen for the past 30 years for the average worker ! In reality, it’s the union workers who have managed to maintain a quality standard of living. Maybe instead of bashing union wages & trying to depress them, we should increase wages across the board for the private sector or the American Dream of a decent life is gone. Wage deflation is not a good thing, along with wage deflation comes home value deflation.

Posted by lynd | Report as abusive
 

Interesting spin. How many of the unionized workers voted the right into office this last election? As is typical of the lemmings of the electorate, they fail to see the true colors of those chosen for office. I am far from a union lover, being a lifelong private business owner, however, the plan of busting the unions as well as bankrupting the states, does not surprise me. The righties will reap the financial benefits while the serfs will continue to toil for their feudal lords, but at wages and benefits far lower than they have ever been used to.
Sounds like Henry Ford has been resurrected from the dead.

Posted by cranypaul | Report as abusive
 

A bit of a problem: there is no provision in bankruptcy law for states to file for bankruptcy. (Local governments are covered, but not states.) Therefore, the first thing that the Republicans would need to do is rewrite the bankruptcy law. Trust the dingbats to do their homework.

Posted by salestax | Report as abusive
 

Has anyone calculated the effect of the tax deal on states, like Illinois, that set state income tax rates as a percentage of Federal adjusted gross income?

Posted by jbc1 | Report as abusive
 

While states can’t actually declare bankruptcy, they can go broke. Dissolving public sector unions makes sense. The states are bargaining with the unions using taxpayer money (money the state does not earn, only collects).

Public sector unions inflate salaries and benefits beyond the private sector levels because there is no ownership in the government; it’s more like cronyism. It’s a lose-lose situation.

Watch Greece, Ireland and other countries with unsustainable debt. The unions are draining their economies with unreasonable demands. Entitlements and unions are difficult to break but it must be done to save the states.

Posted by SparkyP | Report as abusive
 

Interesting how the democrat party is bankrupting every state and city and that they control, but you claim its a GOP plan, sounds like Egypt blaming Jews for shark attacks. However, you might be right that the republicans may benefit from their incompetencies. The dems have shown themselves as self-serving and now they are reaping what they have sown. Too bad, so sad.

Posted by goon | Report as abusive
 

Check Mate!

Stop the union parasites from eating our hard working businesses.

Posted by JoeS | Report as abusive
 

Public employee unions should all be decertified and salaries pegged to the private sector.

Posted by Nexialist | Report as abusive
 

Sounds like a good plan as far as this Red Stater is concerned because we can see the Blue States circling the drain and we know what’s next…federal handout. The liberal test beds have run their economies into the ground. They shouldn’t expect flyover country to bail out their bad policies. Did you see the way CA voted in the last election for heaven’s sake? These people are clueless…drop the guillotine.

Posted by gregd01 | Report as abusive
 

lynd wrote: “… we should increase wages across the board for the private sector or the American Dream of a decent life is gone. Wage deflation is not a good thing, along with wage deflation comes home value deflation.”

The American Dream used to be that you can build a life from scratch here, that you can come here with nothing and end up with a business, a house, even wealth that you can leave to the next generation.

Guaranteed wages and social security for some mean less opportunity for the rest of us. That is why I left Europe; I saw that I was going to have to pay for the babyboomers retirements and healthcare for the rest of my life. America is now worse than Europe.

Home values should fall! They are inflated. The entire Obama agenda is about keeping the bubbles inflated, bailing out the rich, the babyboomers, the too big to fail companies, union/government workers.

Posted by peterverkooijen | Report as abusive
 

Bankrupt CA? Overspending by the state is what will or will no bankrupt a state. Deciding not to underwrite debt and calling for the state to be responsible is not bankrupting the state of CA-it is ceasing to enable irresponsibility.

Posted by swats | Report as abusive
 

If this is a secret Republican plan why have the Democrats been helping them bankrupt the state by overspending? Are you sure this isn’t a secret Democrat plan to destroy the Federal System and give all power to the federal government? That makes more sense than Pethokoukis’ lame theory.

Posted by 2421rich | Report as abusive
 

One can only hope that the public sector unions can be declared unnecessary (smashed, if you will). The government negotiators have no stake in keeping the unions within realistic boundaries. And, why not? It’s not their money the government is giving away; it is ours.

The unions arbitrarily drive up the salaries and benefits of workers. Look at the gulf that is widening between public and private sector jobs. This has to stop. It is unsustainable.

Posted by SparkyP | Report as abusive
 

State Bankruptcy — Thank God that I’m finally hearing of a plan to do what has been obviously needed for quite a while in NY state.
Here, the ‘take’ for public-employee union entitlements is projected to DOUBLE in 5 years, and it is already HIGH! The old contracts MUST be broken.
The union leadership has this state in a neck-lock, and we taxpayers are just gasping for air while any mobile business works to escape, if they haven’t already.
The good thing about Andrew Cuomo being elected governor is that HE, a hard-core democrat if ever there was, gets to manage the bankruptcy and receive the ire of his union-donor supporters! How ironic.
He and Moonbeam Brown in CA will join a very select ‘club’ of the guvs of bankrupt states. They will make a great pair!

Posted by DACrea | Report as abusive
 

Currently States cannot declare bankruptcy, so any insolvency is basically an issue between taxpayers and the govt worker unions whose fat compensation packages are driving State budgets to catastrophe. Ultimately taxpayers will insist on cuts.

Republicans would be foolish to create a bankruptcy option that would surely be used….thus pitting taxpayers against bondholders instead and relieving the pressure from govt worker unions.

Think of the auto companies, unions and bondholders as an example of a fairly similar situation.

Aside from the bad politics, it’s also terrible government policy, with all municipal bonds trading lower on the new risk (paying higher interest rates) and increasing States’ costs of borrowing, and ultimately taxes.

Eliminating Build America Bonds unless States clean up their act is fine, but otherwise Republicans should do nothing. Let States renegotiate with unions to lower costs and stabilize budgets.

Posted by AlanReuters | Report as abusive
 

More proof the Republicans and corporations are the enemy of the American people. The unions my be incompetent, but they are certainly not the enemy of working people. One commenter is right rank and file conservative voting habits. Working rednecks, especially in the South, get their news from talk radio and Fox News too. We are working on a public education campaign to change that.
http://www.locustfork.net/

Posted by fast2write | Report as abusive
 

Ha. Ha. You have got to love those Republicans especially Sen. Boner and the gay caballero Sen. Grammcracker. If Debt is Prosperity, then we are the richest county in the world! Ha. Ha. All in just 10 years!

At least they are upfront about their intentions of following the Bush/Obama administration agenda of bankrupting America into submission to the World Banksters and the new economic world order!

God, how they hate Independence and government for and by the people and they especially hate any social services for the people including: Employment Benefits, Social Security, Unions, Social Services and public ownership of Lands and Natural Resources and public owned Infrastructure including buildings, highways and bridges.

Republicans pray for the day that Austerity kicks in for Americans and the States are bankrupt and in receivership by the Bank of International Settlements and the International Monetary Fund which is backed by the United Nations and enforced by NATO’s 3 million troops.

The ultimate goal of the World Banksters fiat money debt scheme is International monetary control of each nation by international Totalitarian corporate rule.

Posted by windcatcher | Report as abusive
 

@gothardbahn,
totally agree, love it! Best of luck GOP, no more insane benefits and pensions….

Posted by BHOlied | Report as abusive
 

@fast2write,
if you disagree so much with fox news perhaps you at least enjoy difference of opinion?

without fox, who would report conservative viewpoints?

Posted by BHOlied | Report as abusive
 

@cranypaul,
I hope NO union workers voted for the GOP. Why would they be in a union if they know where their dues are going – and let me give you a hint, its not to conservatives…

Posted by BHOlied | Report as abusive
 

Look for the Union Label…

Look for anything Union to evetually fail…

Look for the Unions Label…

Look at countried like Greece, the EU (and soon the U.S.A.) being bailed…

Get the point?

Posted by GreatKills | Report as abusive
 

The Empire Center recently had a symposium on the pension bomb in NY. Using private sector accounting guidelines, the pension funds are $120 BILLION underfunded. To meet our “obligations” to the pension system, school budgets, alone will have to increase by 3.5% every year and that does not include salaries, health care, etc. The system is not sustainable and will collapse. Already 1.7 million people have fled NY since 2000, the highest out migration of any state.

Posted by Laury | Report as abusive
 

How many of you would consider yourself poor? Work 2-3 jobs? Because that is what I have to do just to survive as a single woman. Minimum wage did not go up for 8 years under the Bush administration. How many of you make under 20,000 dollars a year? How many do a great job to get a yearly 3 percent raise? Don’t think that smashing the unions will increase the pay rate of non union workers. It will just be a reason to lower rates overall. And anyone who doesn’t understand that decreasing wages is going to affect all business shouldn’t be in business at all and probably won’t be for long. Obama is doing his best to keep the economy ‘wheel’ rolling. Because if it stops….we’re all in trouble. As a political layman even I understand that. I wish people would quit thinking about what is good for a political party and start thinking about what is good for the American people as a whole.

Posted by wmslib55 | Report as abusive
 

Hello,

According to Professor Myron Hulen from CSU’s College of Business, the average monthly Colorado PERA retirement benefit is $2,772. I should add that each retiree bears the bulk of health care premiums.

From “Bad news for [Colorado] PERA” http://www.denverpost.com/opinion/ci_147 49919

Respectfully,
Astro

Posted by AstroPinion | Report as abusive
 

It is not union slaves who have been bankrupting States, it is Agency Heads who receive salaries of $250,000 to $300,000 per year and then retire at 85%-100% of their outrageous salaries. These folks and other high paid
government workers, like Judges and Department Managers,
should receive no more than the median wage income in the Counties where they serve.

Posted by Effie | Report as abusive
 

Boycott Republican Newspapers, Businesses, Restaurants,
Trash Mouthed TV Commentators, etc. This theft from the
common man must stop now.

Posted by Effie | Report as abusive
 

Republicans are the most deceitful, destructive people
in this nation they like to call a “democracy” when it is time to call other people’s sons and daughters to fight their ungodly wars.

Posted by Effie | Report as abusive
 

Republicans are the most deceitful, destructive people
in this nation they like to call a “democracy” when it is time to call other people’s sons and daughters to fight their ungodly wars.

Posted by Effie | Report as abusive
 

BOYCOTT GREEK RESTAURANTS.

Posted by Effie | Report as abusive
 

This is all part of the republican’s single goal, consistent since 1980, to transfer the country’s wealth and income to the top 10-15%. Eliminating unions is an important step in that direction, for it will, as wmsblib55 correctly states, lower the wage rate throughout the workforce. And because she is so right, I am quoting her post:

From wmslib55:
How many of you would consider yourself poor? Work 2-3 jobs? Because that is what I have to do just to survive as a single woman. Minimum wage did not go up for 8 years under the Bush administration. How many of you make under 20,000 dollars a year? How many do a great job to get a yearly 3 percent raise? Don’t think that smashing the unions will increase the pay rate of non union workers. It will just be a reason to lower rates overall. And anyone who doesn’t understand that decreasing wages is going to affect all business shouldn’t be in business at all and probably won’t be for long. Obama is doing his best to keep the economy ‘wheel’ rolling. Because if it stops….we’re all in trouble. As a political layman even I understand that. I wish people would quit thinking about what is good for a political party and start thinking about what is good for the American people as a whole.
End quote.

Posted by FrankBlank | Report as abusive
 

All the folks who are complaining about the pay of government workers should be forced to pay for their own services. Pothole in their street? Let them negotiate the price with Jimmy’s Paving. House burgled? Let them call Blackwater. House burning? Let them call Evian. Having a heart attack on the street? Let them call a cab. Shafted by Wall Street? Let them pay a PI 300 a day. Hmmm, Wall Street, hmm, Orange County 1994, hmmm, broke… why do those words fit together so well — nah, it couldn’t be, it must be the unions.

Posted by FrankBlank | Report as abusive
 

I am a nurse for a federal agency. I make exactly on par what a nurse makes in the “efficient” private sector. (Benefits, leave and salary…)

As a MN state employee retiree I assure you that my pension has been jointly funded as part of my compensation package throughout my 26 years of employment. (I contributed 5% out of salary which was essentially matched by my employer as part of my compensation package.)

Most public employees have college degrees vs only about 35% in the private sector. Wages for public employees are on average 4% lower than comparable private sector jobs with comparable KSA’s.

Posted by hm2viking | Report as abusive
 

“Here, the ‘take’ for public-employee union entitlements is projected to DOUBLE in 5 years, and it is already HIGH! The old contracts MUST be broken.”

I’d love to know where this garbage came from – do you even have any evidence to back this assertion up? I think not. In fact, don’t bother – by actually showing you the errors used in cherry-picking such an arbitrary figure, I’d just upset you and you clearly aren’t likely to be changing your mind based on the facts.

“Look at the gulf that is widening between public and private sector jobs. This has to stop. It is unsustainable.”

Look to the gulf that is widening between the personal tax burden and concentration of wealth into the polutocratic top 2% in the USA. THAT is what is unsustainable.

“Sounds like a good plan as far as this Red Stater is concerned because we can see the Blue States circling the drain and we know what’s next…federal handout. The liberal test beds have run their economies into the ground. They shouldn’t expect flyover country to bail out their bad policies. Did you see the way CA voted in the last election for heaven’s sake? These people are clueless…drop the guillotine.”

Take a look at how much your ‘red state’ gets in Federal funding vs. the ‘blue states’ – or should I say, engines of the economy, and then edit out your outrageous comments about blue states needing federal handouts. Red states are generally the highest recipients and lowest contributors to Federal funds – and oddly enough its exactly those welfare states that hold the strongest views on these issues. Don’t kill your golden goose.

for more information here is a good place to start:
http://en.wikipedia.org/wiki/Federal_spe nding_and_taxation_across_states


The American Dream used to be that you can build a life from scratch here, that you can come here with nothing and end up with a business, a house, even wealth that you can leave to the next generation.

Guaranteed wages and social security for some mean less opportunity for the rest of us. That is why I left Europe; I saw that I was going to have to pay for the babyboomers retirements and healthcare for the rest of my life. America is now worse than Europe.

Home values should fall! They are inflated. The entire Obama agenda is about keeping the bubbles inflated, bailing out the rich, the babyboomers, the too big to fail companies, union/government workers.
- Posted by peterverkooijen”

So you swallowed the conservative agenda hook, line and sinker, then you found out that it’s exactly the same over here, in a country where all they’ve managed to achieve is a quarter of the population without health care – and yet you are still unable to admit this ideology is fundamentally flawed.

Why are you blaming public and union workers for something as functionally disconnected as prices in the housing market?? Since Unionized and public workers together account for less than 7% of the United States’ work force, and under 33% of them are unionized. It doesn’t seem that the influence they could exert on the market could be the reason for high property prices.

The republican party and their allies are playing a negative-sum game in order to win. The problem is, they will destroy their prize by playing this way.

Posted by Retalliouns | Report as abusive
 

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