James Pethokoukis

Politics and policy from inside Washington

GOP to spendthrift states: The check will never be in the mail

Jan 7, 2011 20:33 UTC

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.


A good pie chart would be tax revenue by state before we hit the bog.

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More on states going bankrupt, this time with added Felix Salmon goodness

Dec 8, 2010 21:52 UTC

Felix Salmon — who, like me, works at Reuters but, unlike me, is officially a citizen of no nation and operates from a specially modified Yakovlev “Yak” 77 that only lands to refuel and take on provisions — comments on my post about GOP plans to push states into bankruptcy:

If it were implemented, or if it even looked like it might get implemented, prices of municipal bonds would plunge, and most states would find it pretty much impossible to borrow money. As such, facing a massive and immediate liquidity crisis, they would be in more need of a federal bailout than before the bankruptcy legislation was seriously mooted.

The fact is that there’s only one reason to invent a Chapter 8 bankruptcy provision for states—and that’s to come up with an efficient and legal way to impose losses on bondholders and other creditors. (Chapter 9, which applies to cities and other municipal entities, doesn’t apply to states.) The creditors, fully aware of this, would immediately cease lending, certainly to the rockier states like California, Illinois, and New York. That’s not what we want. As a result, unless or until those states can bring their budgets into a primary surplus, introducing such a provision would certainly do more harm than good. And if those states can bring their budgets into a primary surplus, then we don’t need the bankruptcy provision, since they’ll be easily capable of rolling over their debts.

If the states had a bankruptcy provision all along, then I’m sure some people would be thinking seriously about whether it made sense for one or more states to file. But they don’t, and there’s basically no way of getting there from here. As such, the idea’s a non-starter.

Wow, states not being able to borrow. That sounds more like a feature than a bug to me. This would give governors like Chris Christie another tool in their arsenal. Look for legislation along this line next year.

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

Dec 7, 2010 18:42 UTC

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.


“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.

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