Britannia Radio

Conservative chorus calling for states’ right to declare bankruptcy

By Nathan Diebenow

Sunday, December 26th, 2010 -- 9:23 pm

A chorus of conservative pundits are calling for bankruptcy laws to be changed so that all 50 US state governments might have the chance to restructure their debts, an ability currently limited to corporations, municipal entities, and private citizens.

"Many states, including those with the country’s largest population centers, are now on a path to insolvency," Grover Norquist. anti-tax activist, wrote in a recent Politico editorial.

He continued, "This is primarily due to fiscally promiscuous lawmakers, skyrocketing Medicaid costs and unsustainable gold-plated government employee pension plans that most Americans could never dream of."

Like Norquist, David Skeel in the Weekly Standard marked the state of California at the top of the hit list due to its possible $25.4 billion deficit next year.

"Although bankruptcy would be an imperfect solution to out-of-control state deficits, it’s the best option we have, at least if we want to have any chance of avoiding massive federal bailouts of state governments," Skeel wrote in November.

Crooks and Liars' karoli noted, however, that California's "promiscuous" lawmaker - Republican Gov. Arnold Schwarzennegger - has refused to use other tools at his disposal to raise state revenues.

"Arnie has now been governor of this state for half of (Democratic Gov. Gray) Davis' term and then one of his own," karoli wrote. "In that time, he has vetoed any effort to get oil companies to pay their fair share of taxes in this state, he has slashed programs to the bone, and the 'fat pensions' are ones beefed up by the likes of the Bell City Council, not ordinary employees."

karoli said that the conservative call to give states the power to declare bankruptcy is merely a new attempt to destroy public employee unions.

"In conservatives' worlds, the mismanagement of state finances should be on the backs of teachers, policemen, firefighters, and public employees," she wrote.

Public employee unions are historically allied with the Democratic Party; however, given the ease by which President Barack Obama froze pay for federal employees, the federal law banning state bankruptcies could be on the table.

"From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group," James Pethokoukis, the Money & Politics columnist for Reuters Breakingviews, wrote earlier this month.

"For the GOP, it’s an economic and political win," he concluded.

Skeel, a bankruptcy expert at the University of Pennsylvania, said that bankruptcy could give states the tools with which to "play hardball" with not only unions but also bondholders.

"Ideally, bondholders would vote to approve a restructuring," he wrote. "But if they dug in their heels and resisted proposals to restructure their debt, a bankruptcy chapter for states should allow (as municipal bankruptcy already does) for a proposal to be 'crammed down' over their objections under certain circumstances."

Skeel continued, "This eliminates the hold-out problem — the refusal of a minority of bondholders to agree to the terms of a restructuring — that can foil efforts to restructure outside of bankruptcy."