Exactly a month ago, I wrote a piece on a “secret GOP plan” to nudge fiscally troubled states in bankruptcy, giving their governors a chance to rewrite existing public employee union contracts and take other drastic measure to restore solvency. Step 1: Eliminate the Build American Bond subsidy to make it hard for states to borrow. [DONE] Step 2: Force states to reveal the true extent of their pension liabilities. [COMING SOON] Step 3. Rewrite the federal bankruptcy code [COMING SOON]. Two recent events give me further confidence in my call:
1) Note that Rep. Paul Ryan yesterday reiterated that the GOP had no interest in a state bailout. Here his exact words:
We can’t do a bailout. If we bailed out one state, then all of the debt of all of the states is not just implied, but almost explicitly put on the books of the federal government. Then the federal debt will go from here to here by the amount of state debt. There seems to be some kind of implicit belief that [state bonds] are federally backed — they’re not. … I am a supporter of Devin Nunes’ bill which is asking just for a clearer accounting. If you want to enjoy the tax expenditure of tax-free bonds as a state or a municipality, give us a clear accounting of your liabilities. They use discounts rates of something like eight percent in many states to measure their pension liabilities, which is just not reality. We’re going to have lots of hearing on this. … We need to learn more about what states are in what situations, what are the timing of these things, and what’s the proper response. And I’ve been working on something myself on what I think would be the proper federal response … but we are not interested in a bailout. … [Some states] are already telling us [about their dire circumstace]. But should taxpayers in frugal states be bailing out taxpayers in profligate states? … Should taxpayers in Indiana, who have paid their bills on time, who have done their job fiscally, be bailing out Californians, who haven’t? No, that’s a moral hazard we are not interested in creating.
2) Also note today’s posting by Joe Weisenthal at Business Insider:
Ben Bernanke is speaking in front of the Senate today, and one of the big topics during the Q&A session is the state of muni finances. The Fed Chairman doesn’t expect any state to default, but he also says he doesn’t believe it’s within his mandate to bail out the states (e.g. by buying muni debate) should it come to that. The Senators keep hammering on this point, and there’s a reason for it. The GOP is hoping for states to collapse, and they want to be absolutely sure nothing gets in the way of that. … They’re also pushing for changes to accounting rules that would force states to present their finances in a manner that would look uglier. Also, part of it is endless talking about the issues, which has the effect of unnerving investors. There are various reasons the GOP wants this. One is that it would be disruptive to the economy ahead of the 2012 election. The medium term goal is to crush public sector unions. A longer term goal is to fundamentally alter the pension system.