During the 2008 financial crisis, the federal government reacted in a frantic, ad hoc fashion, tapping taxpayers for bailouts galore, running roughshod over the rights of bondholders and catching the American people unaware and unprepared. In contrast, we still have time to prepare for the looming crisis threatening to engulf California, Illinois, New York and other state governments.If the law is changed, I expect Illinois to be first to declare.
The new Congress has the opportunity to prepare a fair, orderly, predictable and lawful approach to help struggling state governments address their financial challenges without resorting to wasteful bailouts. This approach begins with a new chapter in the federal Bankruptcy Code that provides for voluntary bankruptcy by states, a proven option already available to all cities and towns across America.
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. Illinois has a $15-billion budget deficit, prompting its governor and lame-duck Legislature to hike its personal income tax rate by 66%. New York, where 73% of the government workforce is unionized, is staring at a $10-billion deficit.
There has been an organized federal bankruptcy process for municipalities since the 1930s, and a handful of cities, towns and counties - most notably California's Orange County in 1994 - have gone through municipal bankruptcy and gotten their fiscal houses back in working order. A bankruptcy option for the states would look very similar to Chapter 9 municipal bankruptcy, with some necessary modifications.
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2 comments:
What's the alternative?
A federal bailout? And with the sheer number of States and cities now underwater, how can an already bankrupt U.S. then survive?
Impossible.
It's been odd watching this objectively from afar...
I'm friends with a married couple, both Illinois State retirees. I asked what plans they were making for when the State could no longer pay their pensions. Their response?
"Uh... what are you talking about?!"
And this attitude is EXACTLY why governments at ALL levels are about to experience a meltdown.
Man, it's gonna get ugly.
I've had similar converstations up here. It goes like this--pension are guaranteed by the state constitution, and they state "can't do this." But the constitutions can be amended, the state could default, or maybe, go bankrupt. That's not to say that retirees end up as a pathetic souls--remember Gerald O'Hara sorting his Confederate bonds in "Gone with the Wind?" But perhaps the over-$100,000 pensioners will get "a haircut." Or the double-dippers will have to choose their single pension source.
This story won't have a pleasant end.
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