I certainly like the idea of allowing states like California to declare some form of Bankruptcy. As Jeb Bush & Newt Gingrich recently noted in a piece, Better off Bankrupt:
[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. The new law could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers. The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.
I certainly am a big fan of dealing with the bloated union contracts and state employee pensions that have ballooned to create an unsustainable state budget. Don’t think we haven’t created a monster? Check out this stat:
The figures for next year’s budgets are staggering. California, which faces a $25.4-billion budget shortfall, will pay $100,000+ pensions to more than 12,000 state and municipal retirees this year. A Stanford study puts the state’s unfunded pension obligations at more than half a trillion dollars.
While some form of Bankruptcy makes sense when looking at these numbers, my concern is 2 fold. First, that states will look at the new Bankruptcy as a crutch to never really change their spending ways. Bush & Gingrich adrress that:
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.
That makes sense, but it is still a concern I have.
My second concern is how suck a bankruptcy would effect the state’s bond rating & the overall ability to borrow money. Again, Bush & Gingrich have a response:
Third, the new law should allow for the restructuring of a state’s debt and other contractual obligations. In a voluntary bankruptcy scenario, states, like municipalities, will have every incentive to file a reorganization plan that protects state bondholder claims and their ultimate recovery. States will evaluate their future access to bond markets and their prospective borrowing rates as they formulate the optimal restructuring plan.
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.
The lesson is that voluntary bankruptcy offers taxpayers the option to restructure state finances responsibly to achieve long-term fiscal health — which can only improve California’s bond rating since it is the worst in the nation— instead of simply having to accept the Sacramento solution of another tax increase.
Overall I think the Bankruptcy option may work, but it is something that must be carefully addressed.