Washington Mulls New Bankruptcy Rules for States

One policy question on the front of many people's tongues in this year of Republican control of the House is, what are the feds going to do about budget-busted states? This New York Times front-pager from today doesn't exactly answer that question, but it demonstrates that people with or near power are asking it with some urgency, and (hide your wallets!) are making explicit comparisons to the illegally bailed-out General Motors. Sample:

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government's aid. [...]

Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975. [...]

"The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed," said Harry J. Wilson, the lone Republican on President Obama's special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.

Mr. Wilson [...] has said he believes that New York and some other states need some type of a financial restructuring.

He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.

"Now Congress is much more conservative," he said. "A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it's a real problem. That's what I'm concerned about."

The Times points to two Republicanoid proposals to deal with this: A Newt Gingrich speech from November urging a federal state-bankruptcy law that would "prohibit tax increases as part of the solution," and a November Weekly Standard article by David Skeel that posits bankruptcy as the best option for preventing a bigger federal bailout, and takes eight paragraphs to tiptoe through the Tenth Amendment and other consitutional "barriers."

Color me trebly skeptical. First, I'm always skeezed out by hand-waving in the face of constitutional objections. Second, until states get a little bit past considering such no-shit-Sherlock ideas as killing subsidies for film production, I won't be remotely convinced that they have come to terms with the blunt fact that they are out of money. State governments need to directly confront the consequences of their own blatant misgovernance, rather than have the can kicked to some faraway authority that the self-deluded political class and citizenry can then blame; politicians and political parties need to be punished for their malfeasance. And lastly, any movement initiated by the House GOP is going to look one helluva lot different after the Democratic Senate and the union-friendly White House are done mangling it. There is no way, given the realities of public sector union dominance of Democratic fundraising, that federal lawmakers are going to sign off on something that doesn't give at least partial veto power to the racket that helped get us into this mess in the first place.

Our three we-told-you-so cover stories: "The Next Catastrophe: Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode," from February 2009, "Failed States: After a long spending binge, governors go begging for a handout. It won't be their last," from May 2009; and "Class War: How public servants became our masters," from February 2010.

And never forget: When union honcho Andy Stern was confronted by the L.A. Times about his role in driving the state budget into the ditch, he said "I think democracy is an ugly thing sometimes."

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  • Old Mexican||

    One policy question on the front of many people's tongues in this year of Republican control of the House is, what are the feds going to do about budget-busted states? This New York Times front-pager from today doesn't exactly answer that question, but it demonstrates that people with or near power are asking it with some urgency, and (hide your wallets!) are making explicit comparisons to the illegally bailed-out General Motors.




    Bailing out states makes sense because their bond rating would continue to be strong thus giving the bond buyers enough confidence to think they were not the stupid chumps they really are for trusting the state gvernments with their money. So... It's really for the children[-like]!!

  • Old Mexican||

    When union honcho Andy Stern was confronted by the L.A. Times about his role in driving the state budget into the ditch, he said "I think democracy is an ugly thing sometimes."




    Democracy: Auction of stolen goods.

    Ugly indeed!

  • ||

    Is this from the forthcoming Old Mexican's Devil's Dictionary? More, please!

  • ||

    This could throw a ton of uncertainty into the market.

    Good intentions don't count for squat in asset valuation, and if investors don't know what's going to happen with future issues, then they won't just charge more interest.

    The market just won't be willing to buy much of their debt going forward. If they think things are bad for the states now, just wait 'til the market for the states' future debt issues dries up.

    This shows, once again, that the states won't make the necessary cuts until it's absolutely necessary. ...and we're almost to the point that it's absolutely necessary.

    No point in letting them off the hook now.

  • Almanian||

    just wait 'til the market for the states' future debt issues dries up

    Then the federal government will just need to pass a law forcing markets to lend to the states and purchase their debt bonds. "Interstate Commerce, General Welfare" - that should cover it.

    Problem solved!

  • Pip||

    A federal government that can force you to buy health insurance is a federal government that can force you to buy municipal bonds.

  • ||

    Dont forget the Good and Proper Clause.

  • creech||

    Agreed. Bankruptcy is the easy way out. Let them raise taxes and let the taxpayers howl. Those responsible for the budget busting legislation will (one hopes) never hold office again nor will their ideas be of any consequence. Would love to see bondholders foreclosing on state property - turn the capitol into condos, sell some state parks to the scouts or wildlife conservation groups,
    auction off the gov's limo.....

  • ||

    Those responsible for the budget busting legislation will (one hopes) never hold office again nor will their ideas be of any consequence.

    *snort*

    Dream on. They will just blame "speculators" and "libertarians".

  • ||

    The Tea Party did some pretty good damage though, the jury's still out on what effect that will ultimately have, but bailing out California is almost as bad as bailing out Wall Street in a lot of places, and, like I said, maybe the Tea Party's spent. ...but I wouldn't want to be the first politician to test that theory.

  • ||

    If the biggest problem such states face is pension obligations which are guaranteed by their respective constitutions--and my casual impression is that that is indeed the case--can't they just amend their constitutions to remove that protection? I know it's easier said than done but at least it's another option for dealing with the problem.

  • ||

    Desertification? ...of public employee unions?

    That's the dream.

    That's a little hard to imagine though. I'd bet on world peace and a cure for cancer first.

  • ||

    until states get a little bit past considering such no-shit-Sherlock ideas as killing subsidies for film production

    But- but- MULTIPLIER!!!111!!!

  • ||

    When union honcho Andy Stern was confronted by the L.A. Times about his role in driving the state budget into the ditch, he said "I think democracy is an ugly thing sometimes."

    So, should we put him down as another fan of Chinese governmental "efficiency"?

  • ||

    Then the federal government will just need to pass a law forcing markets to lend to the states and purchase their debt bonds.

    I think they'll just let the Fed handle it.

  • Fluffy||

    Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

    Isn't this "problem" also its own solution?

    If the states are "sovereign", then a state can say: "We aren't paying our bond obligations, and we just passed a new law canceling our union contracts. Go fuck yourselves."

    Voila. Bankruptcy without federal bankruptcy court.

  • ||

    Be careful what you ask for, because you just might get it. $20 tells me that the public unions will be running to Federal court about 15 minutes after such a law passes. If the unions will, consider the 10th amendment dead letter...and the real fun begins.

    I'm not saying that isn't a bad idea. What I would do is write the bill with care, because a bad job can open up Pandora's box once in a court room.

  • ||

    If the unions will == If the unions win. Damn...

  • ||

    I think the problem here is that many state constitutions guarantee pension benefits, so you can't erase them with a law.

    For me the schadenfreude is that all this totally contradicts the left's concept of government. They can't claim that the states are bankrupt because they spend too much on the military, or because taxes are too low, or because they don't spend enough on education, or because evil Republicans have been in control, or because unions have been hobbled. No, it's the inevitable result of the Democratic wishlist: "progressive" big government, high taxes, kowtowing to unions, etc.

  • sevo||

    PapayaSF|1.21.11 @ 11:30AM|#
    "...the left [..]can't claim that the states are bankrupt because....taxes are too low,..."

    Not only *can* the left make that claim, they *are* making that claim, at least in CA.

  • ||

    Perhaps I should have said "can't claim with a straight face...." It's the highest-tax states which are in the deepest holes.

  • ||

    Very good point! I will throw it in a lot of liberal faces in the coming months...

  • RG||

    Can't blame it on the owners of capital, either.

  • Gray Ghost||

    Todd, not to sound like a broken record, but isn't this an 11th Amendment issue? Don't states have to consent to be sued in Federal court? I'm not even sure if a state's creditors can use traditional creditor self-help measures like seizing inventories, attaching liens to bank accounts and other property, stuff like that.

    Re the pension obligations: is there a 14th Amendment constitutional issue from a bankrupt state unilaterally modifying a retirement scheme for its workers? I mean, workers do have a property interest in their retirement programs, don't they? One that can't be deprived without due process. Does the need for due process therefore compel the state to participate in a federal bankruptcy-type proceeding? Interesting questions.

  • ||

    I see your point on the 11th Amendment. However, while the Feds can't force a state into court, the states can have it set up so that people can sue them in court regarding certain matters. IANAL, but my understanding is that a state would have to, bare minimum, make sure they don't implicitly or explicitly give permission to these kinds of suits before being thrown into court. I know NY State in particular allows financial claims to be allowed against them. Simply put, this is going to get really ugly, really fast if someone doesn't dot their Is and cross their Ts.

  • ||

    Depends on the meaning of "sovereign".

    Sovereign as in F-off Washington we are not going to implement Obamacare. No, you are not going to send our tax money down the sink holes of CA, IL, NY, MA etc. And since we at least 1/2+ 1 of the states, no Washington you can't pull a War of Northern Aggression on us.

    OR

    Sovereign as in, no you peasants can't sue us for anything, we'll raise your taxes to 100% if we feel like it.

    Can you have one without the other?

  • cynical||

    They're sovereign, but bound (nominally, at least) by their own constitutions. But if the constitution was changed to explicitly allow them to fuck the pubsec unions, they could do it. The feds would probably come up with a bullshit reason to intervene if the Dems were still running the show of course.

  • ||

  • ||

    President-elect Barack Obama proposed on Thursday having the U.S. Federal Reserve buy municipal bonds to cut lofty borrowing costs for cash-strapped cities and states.

    The facility would be similar to a backstop program that helped thaw the commercial paper market, Obama said in an outline of his plan to revitalize the economy posted on his website.

    "This new facility should be designed to protect taxpayer resources while ensuring that state and local governments can continue to provide vital services to their residents," he said.

    Reuters

    Believe it or not, I actually thought the Fed was somehow prohibited from doing this, but (silly me!) there appears to no limit to what government agencies* can do.

    *Go ahead; convince me the Federal Reserve is "independent" and not an arm of the Executive Branch. Just be sure to pack your lunch.

  • Gray Ghost||

    Since they've been secretly market-making/propping up the last two year's worth of Treasury bond auctions---or so you all tell me---why not also have them buy muni bonds above cost? Keeping bankrupt sovereigns afloat seems to be what they do.

  • ||

    I'm betting this is part of the planning now.

  • ||

    President-elect Barack Obama proposed on Thursday having the U.S. Federal Reserve buy municipal bonds to cut lofty borrowing costs for cash-strapped cities and states.

    Meet Quantitative Easing 3: Fiscal Boogaloo!

  • ||

    I like QE3: Looting the Dead

  • ||

    More like Looting the Unborn.

  • The Unborn||

    Suddenly, abortion seems the better alternative.

  • Atchafalaya||

    If states are forced to pay off the debts of other states for the programs those citizens voted for and their elected officials strapped them with would not everyone else being forced to pay be considered taxation without representation?

    Seems to me it would be such. Your are taking from one group that did not get all fucking wild eyed with the check book to pay for the ideals and votes of people in other states.

    If we did not get to vote on all these pie in the sky programs in Cali etc why should we be forced to pay for them when those that did vote for it all are not even being forced to pay?

    If the rest of the states knew they could just vote themselves all sorts of free shit and never be expected to actually pay for it I think they would have joined these liberal states and spent beyond their means as well.

    You voted for it you fucking pay for it. What is is with liberals and their non stop belief that they should be free to breed without limits and spend money without limits and everyone else will fucking pick up the tab.

    Then these worthless pukes expect me to be civil with them while they rob me blind. Oh just bend over and smile it's the civil thing to do!

  • Old Mexican||

    Re: Atchafalaya,

    If we did not get to vote on all these pie in the sky programs in Cali etc why should we be forced to pay for them when those that did vote for it all are not even being forced to pay?

    Well, our great resident statist philosophist, Tony, said that the principle that drives people's decisions is sacrificing a little personal freedom for a "greater good". I would imagine the "greater good" he aluded to was paying the fat pensions of Californian bureaucrats by Texans, Iowans, Montanans, Delawarians, et al.

  • Polly Annapolis||

    Hey, we're all Americans!

    I'm sure California will some day be willing to help Montana, too.

  • Cecil||

    You assume that founding principles such as taxation without representation still have any meaning, when a simple wave of the hand while intoning "Commerce Clause General Welfare" magically renders all limits on the federal government null and void.

  • Cecil||

    Make that NO taxation without representation.

  • ||

    You're using logic. You can't do that with liberals. It's all about how things feel. It felt good to give all those SEIU workers raises and benefits the private sector would die for, and it would have felt bad not to. It felt even better to let them retire at age 50 with 80+% of their final year's pay and full medical benefits, and it would have been Hitler-cruel to make them work to age 60, and don't you even suggest 65 you demon!

  • ||

    Like the sentiment Atchafalaya. Problem is, whoever is left holding the bag when the music ends will get blamed.

    More & more I count the end of the Republic with the courts' decisions that those who don't work get to vote.


    (& oh yeah -- free the Atchafalaya. You know that New Orleans is bad when even the Mississippi River doesn't want to go there)

  • Army Corps of Engineers||

    "(& oh yeah -- free the Atchafalaya. You know that New Orleans is bad when even the Mississippi River doesn't want to go there)"

    WE NEED THE JOBS!

  • ||

    Just as an aside, this is a great time to bring something up...

    The states have been in trouble before. I'm going on memory here, but as I recall, it was Mississippi, Florida and Maryland who defaulted on their bonds 'round about the Teddy Roosevelt Administration.

    But back then, before we had all this regulation? If someone defaulted on a bond, be it a state or a company, then the underwriter would buy the bond back at par...

    Well, Florida, Mississippi, and Maryland all defaulted on their state bonds. And the issuer at the time was J.P. Morgan--back in the days when the guy running Morgan was actually one of the elder "J.P. Morgans". He made good on buying back all that bad debt--it almost bankrupted the firm.

    ...rather than bailing out the states, that was the old fashioned solution--the people who underwrote the debt ate the losses if their underwriting was bad.

    And no one would underwrite any more of those states' debt until they made good to Morgan on all those defaulted bonds. It was like being excommunicated from issuing further bonds. ...which was perfect. It's hard for states to finance deficit spending when they can't issue any bonds--it was a check on their budgets.

    Fast forward to 2010, and as a taxpayer, why am I supposed to believe things are so much better now--with all this financial regulation?

    If I buy a TV at Wal*Mart, take it home and the damn thing doesn't work, I can take it back to Wal*Mart and get my money back, without much hassle at all. Regulation has a way of getting in the way of firms competing on quality and customer service--if retail were as heavily regulated as finance, I wonder if I'd still be able to return stuff straight to the retailer.

  • Invisible Finger||

    JP made good but still got his revenge - the imposition of a central bank.

  • M||

    I know tis is probably the wrong thing to say on the Reason website but... didn't the auto bailouts turn out pretty well? Which is to say, at a relatively-speaking, small cost to taxpayers, GM and Chrysler were restructured in such a way that there were not major layoffs in the industry and the companies (or at least GM, not sure about Chrysler) are now profitable.

    Not saying a bailout of the states would go nearly as well, of course.

  • ||

    They still have not paid the money back, and GM lied about it. The problem is not with the bailout, but with the way it was executed. It should have been in the form of DIP financing or a guarantee for that financing. We have yet to see the full effect of screwing the bond holders in favor of the unions that ran the companies into the ground with the help of limp-wristed management.

  • ||

    The "better" the bailouts are perceived as having succeeded, the worse it is for the country. Are you familiar with the concept of moral hazard?

    Whether the auto bailouts went well depends entirely on who you are. Some people got shafted so that the union could benefit.

  • ||

    The magic of accounting.

  • ||

    GM received a massive bailout at a time when they otherwise would have had to close their doors or go through a painful bankruptcy. Even if the bailout turns out to be completely successful, which we are still waiting to see, that is quite an advantage over every other company. Extending subsidy to one chosen individual or group to allow them to play by different rules is wrong.

    Also, the bailout did not prevent major restructuring in any way. THe bailout simply allowed GM to keep certain union deals in place that otherwise would have been thrown away in a true bankruptcy. Basically, it was a bailout for the UAW. Even if the US government gets all of their money back, you still have to think about the alternative uses for that 50 billion, including letting people spend their own damned money.

    Yes, even just receiving money during the hard times distorts the market in dangerous ways, even if the money is paid back in full later. Economics isn't simply a game of balance sheets, you also have to have good underlying fundamentals.

  • ||

    I'd add to what other people are saying that GM was given a $48 billion odd tax credit by the federal government--that doesn't show up as a taxpayer expense through TARP at all.

    There are some other things to say about Chrysler and GMAC--and I'd add to those that whether the auto bailouts turn out well is a function of how they turn out.

    Fannie and Freddie hopped along for decades with an implicit taxpayer guarantee--and that didn't "turn out" well at all.

  • ||

    Since they've been secretly market-making/propping up the last two year's worth of Treasury bond auctions

    I wouldn't exactly call it a "secret".

  • ||

    I'm sure California will some day be willing to help Montana, too.

    Step One:

    Stay in California.

  • ||

    I would love to see California or Illinois default. They don't need bankruptcy laws because they have sovereign immunity, and it would force them to clean up their act. It would also send a nice warning to the other states. We can ignore Greece and Ireland, but once defaults slip to this side of the pond, folks are going to have to sober up.

  • ||

    I think the feds would love for the states to whittle away at their own sovereinty.

  • Jay||

    States won't pay the Fed back.

  • ||

    There is no Constitutional problem if states cannot be forced into involuntary bankruptcy. If a new chapter of the Bankruptcy Code is created for states, and it is entirely voluntary, please explain how this violates the Constitution. Given a distressed state an option entirely of its own choosing is unconstitutional?

    Whether it would be a good policy is another issue, but the Constitution is not a big barrier here.

  • ||

    State constitutions require they pay those pensions. So what? It's no more relevant than corporate bylaws and debt covenants that demand the repayment of borrowed money. If the debtor cannot pay, the bankruptcy court considers all agreements and covenants to pay null and void. The debtor cannot be forced to stay in business or raise its prices (taxes) just because its creditors demand repayment.

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