James Pethokoukis

Politics and policy from inside Washington

The latest on states declaring bankruptcy

January 27, 2011

Some Republicans are against the idea, but a couple of heavy hitters — Jeb Bush and Newt Gingrich — continue to be for it. Here is a bit from their LA Times op-ed:

First, as with municipal bankruptcy, it would have to be completely voluntary.

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc.

Third, the new law should allow for the restructuring of a state’s debt and other contractual obligations.

When California refused to bail out Orange County, the county entered bankruptcy and emerged within 18 months. Within three years, the county returned to an investment grade rating, and it repaid 100% of the principal of the vast majority of its investors by 2000 without raising taxes.

Fourth, the federal judge reviewing the state’s reorganization plan would have the power only to accept the plan as permissible under the federal bankruptcy law, or reject it as inconsistent with that law.

Fifth, the new law should provide for triggering mechanisms to initiate the bankruptcy process that respect the sovereignty of the people of a state.

An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions. If government employee union bosses know that they could have all their contracts annulled under federal bankruptcy law, either through a plan of reorganization voluntarily entered into by state leaders or by the voters through proposition, they may be far more accommodating with state governments to restructure government employee union workforces, pensions and work rules.

Also, Moody’s has begun to take a closer look at state pension obligations, creating new metrics that combine debt and pension liabilities:

statesmoodys

Comments

It is hard to understand what bankruptcy would accomplish. The states are sovereign. They can abolish public sector unions and nullify contracts. They can default on their bonds. The only recourse would be the states’ courts and the jurisdiction of the courts is a matter of state law or the constitution. Conversely, how could a state legislature or governor get a bankruptcy court to agree to a restructuring that violates a state’s constitution.

Posted by cwillia11 | Report as abusive
 

‘An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions.’

Precisely. After reading much of Mr. P’s writings on the subject and Felix Salmon’s shocked rejoinders, it occurred to me that this proposed state bankruptcy legislation would likely NEVER be used, much like nuclear weapons during the cold war. Their mere existence was enough to keep the other side in check or, in this case, keeping rapacious public sector union bosses and their followers from looting the state treasury.

Posted by Gotthardbahn | Report as abusive
 

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