Newt Gingrich and Jeb Bush wrote this week in the Los Angeles Times that they want to revise the bankruptcy statutes to let states file for bankruptcy.
“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.”
What are the financial challenges that need addressing? Here’s some cherry picking from the op-ed:
“[Reorganize their finances free from their union contractual obligations.” [R]eform their bloated, broken and underfunded pension systems for current and future workers.” Get rid of “[t]he lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years….” “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.” (Emphasis added.)
Sense any antipathy for unions? Click on the link above and you’ll see no mention of using bankruptcy to squeeze money from corporations who have lucrative contracts with states. You’ll see no requirement that a bankrupt state cut non-essential services and sell off non-essential assets as conditions to squeezing its employees.
What I see is, I think, an attempt to do to government workers what was done to private sector workers over the past couple of decades – get rid of employer responsibility for funding retirement. Private pension plans are an endangered species, replaced by 401(k)’s, SEP’s and only Social Security in an increasing number of cases. One of the methods used to make the transition was strategic bankruptcy by corporations.
I’ll leave aside the arguments for and against saving for retirement being an individual rather than a societal responsibility. But, I don’t like stacking the deck by the proponents of the change.
I’m not a rabid fan of unions. They’ve done good and bad over the decades to my mind. I am a fan of contracts; and, contracts are invariably the victim of bankruptcies.
Back in 2006, Congress passed a revision to the federal bankruptcy statutes “with the explicit intent of discouraging filings under the Bankruptcy Code.” The CPA Journal. Why? There was a growing sense that bankruptcy was being abused by debtors. Run up $25K in credit card debt, file, and walk away from your creditors, then do it again in a few years. That’s a little bit harder after the revisions in 2006.
In my experience, it’s worse with companies. File, stiff your creditors using the reorganization rules, including your employees and their pension plans, and start fresh on Monday morning. In the case of some companies, repeat as necessary. The thinking is, I guess, better that a relatively small group of creditors feel the pain than society as a whole as the result of a feared rash of liquidations.
Is it a good idea to provide this kind of leverage to states?
Bankruptcy historically has not always been so kind to debtors and the rules stacked against creditors.
From an early, modern era, Supreme Court bankruptcy case:
“This purpose of the act has been again and again emphasized by the courts as being of public, as well as private, interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Local Loan Co. v. Hunt, 292 U. S. 234, 244 (1934) (emphasis added).
States deciding on bankruptcy aren’t going to surrender anything to anyone. We aren’t going to liquidate a state. (Though, do we really need New Jersey?) Rather states would use the rules to take away from others, employees, by threat of an even worse outcome - the same approach used by a laundry list of airlines, car companies and other businesses over the past couple of decades. All extending bankruptcy protection to states will do is focus the pain on some people, employees, rather than diffuse it over all people, taxpayers. “Federal taxpayers in states that balance their budgets should not have to bail out the irresponsible, pandering politicians who cannot balance their budgets" say Gingrich and Bush. Nope, God forbid that – let’s take it out of the hides of the workers.