We wrote last week about an idea being floated nationally–bankruptcy for states. Municipalities can declare bankruptcy under Chapter 9 of the Bankruptcy Code (and we note that the City of Vallejo, California, even after emerging from bankruptcy, is still struggling with pensions and other obligations).
E.J. McMahon, a senior fellow at the Manhattan Institute and its Albany-based Empire Center for New York State Policy, is one of the people we look to regularly for solid research and advice on public pensions. He has countered the idea with an Opinion piece this morning, pointing out what we’ve been hearing—that just the idea of state bankruptcy is upsetting the bond markets. Municipal bonds are supposed to be solid, reliable. We heard that discussion on business radio stations last week–market watchers are certainly alarmed that it is even being discussed.
One of the reasons state bankruptcy is attractive is that, in theory, California’s problems, for example, could be solved internally without a bailout from the rest of the states via the Feds. But if California moves to renegotiate its debt obligations and roils the bond market, market disruptions could ripple throughout the country.
McMahon argues that states have many other tools available to them without needing to submit to a federal bankruptcy judge (pay freezes, mass layoff, furloughs, outlaw or limit collective bargaining).
This discussion highlights the fact that states have promised more than they can deliver–and that it is time for public employees to tell their unions to think beyond the next contract and get ahead of the problem for the sake of the long term health of their municipalities and states.
We are encouraged that Minnesota can get its house in order when the Star Tribune writes tough editorials in favor of freezing teacher pay . The liberal base has been mugged by the reality that keeping the promises we’ve made, for example, to teachers means that school districts will have to cut not only teacher positions but the classes that go with them, such as music and art but also core curriculum. In other words, if we pay the generous compensation packages to some, students and districts pay too high a price.
Likewise at the state level, if we do not pull back on public employee compensation packages, core services like public safety, the courts, and infrastructure will continue to deteriorate.