Is State Bankruptcy a Solution?

What do New York, California and Illinois have in common? They are in fiscal disarray and may soon be asking for a bailout from Congress. Bailing out these states would send a terrible message to other states with significant legacy costs and upcoming budget shortfalls, i.e. Pennsylvania.

To avoid the issue some politicians and political pundits are urging a path to state bankruptcy,  a viable option that would need to overcome Constitutional hurdles. 

Others say state bankruptcies are not a solution at all. Nicole Gelinas, with the Manhattan Institute, explains why:

States’ problems aren’t pretty. The solutions may be messy. But bankruptcy wouldn’t be a messy answer; it would be no answer at all. For starters, states like New York run up “their” debt indirectly. They issue bonds through tens of thousands of separate legal entities. Legally, each is not a government but a “public-benefit corporation.” Each has its own board, its own rules and its own contractual agreements with creditors, from bondholders to unions. Each of those agreements offers creditors different protections.

Like New York, Pennsylvania has a number of independent agencies with significant debt, such as the Commonwealth Financing Authority and the Turnpike Commission.

E. J. McMahon points out another flaw. He argues states already have the power to renegotiate lucrative union contracts, including widespread layoffs and a reopening of a state’s collective bargaining statutes.

At least 18 states already outlaw collective bargaining with some categories of government employees; Virginia and North Carolina prohibit it for all public workers. Two newly elected Republican governors, Scott Walker in Wisconsin and John Kasich in Ohio, have threatened to dismantle their state bargaining statutes if unions fail to make concessions.

It appears the only real solution to the state’s debt problem is reasserting their sovereignty over very powerful public employee unions. Pennsylvania, California, Illinois, and other states with large obligations must insist their political leaders show a little backbone and reform their pension and other long-term obligations.

On top of outlawing public sector collective bargaining, the state should redefine the prevailing wage law, transition state workers to defined-contribution retirement plans, and look at more opportunities to save billions of dollars so we reduce our state oblications.