States Need Bankruptcy Option

Posted: Jan 26, 2011 12:01 AM
States Need Bankruptcy Option

When state governments -- facing intractable budget problems -- come to the Republican House asking for more bailout money, most GOP congressmen are determined to speak with one voice and say "no." But where will the "no" leave the states and their citizens? Can they fix their fiscal woes by their own efforts?

They can raise taxes, of course, and set their states on a death spiral akin to that which has already destroyed Detroit and much of upstate New York. Or they can cut spending, slicing the heart out of vital services like education and police protection. Cuts of this magnitude will almost destroy the education of a large part of this generation of students.

There is a third way: to get to the root of the reasons for their dire crisis in the first place and abrogate their collective bargaining agreements with municipal unions that have brought them to this condition.

States cannot do so on their own. They need the federal government to adopt a bankruptcy procedure to allow them to do it. States are constitutionally bound to honor contracts, so it is only through a federal bankruptcy court that they can be released from the ill-considered and overly generous agreements that bind them.

In bankruptcy, municipal bondholders will -- and must -- be protected. But the bankruptcy court can offer states the option of renegotiating their union agreements to avoid raising taxes or eviscerating their schools. (States would not be forced into bankruptcy, but would enter it voluntarily, seeking the protection of Chapter 9.)

Even if the states had the legal means to get out of their union contracts without federal intervention, they could not do so politically. Union political power is too entrenched to be dislodged even by a determined governor and state legislature.

Don't count on the unions to act responsibly unless they are forced by a bankruptcy court to do so. Look at Detroit. The teachers union is perfectly willing to let the city swoon into a death spiral -- led by its public schools -- rather than concede any of its pay, benefits, pensions and work rules won at the bargaining table.

The city has closed half of its schools and will soon close two-thirds. Class size in high school will average 62 children. But the teachers will get every dime of their bonuses, pay and pensions. The union will even continue to control health insurance, providing it to its members at a markup one-third above that of private health insurance -- paid by the taxpayer.

If the Republicans in the House just say no, Obama will use their refusal to pit them against the schoolchildren of America. He will frame the issue as Republican penury vs. the needs of our schools. And no speeches about profligate state spending will make any difference.

But if the GOP posits the alternative of a bankruptcy procedure for states, it will inject a third option -- reform. Then, if Obama demands a cash bailout and states resist the bankruptcy option, they will have forced the curtailment of state services -- not the Republican House. They will have demonstrated, conclusively, that they value the needs of their union overlords more than those of their constituents.

Finally, the Republican House should pass a state bankruptcy bill to break the political power of the unions and undermine the labor-Democratic Party coalition that does so much to animate and fund their congressional candidates. AFSME, SEIU, AFT and NEA -- the Four Horsemen of the Apocalypse -- spent a combined $200 million on politics in the last cycle.

Pass a state bankruptcy law and abrogate their contracts, and you destroy both their monopoly and their power -- and, along with it, much of the financial base of the Democratic Party.