Newly-elected Senator Mark Kirk has added his voice to calls to allow states to bail out of their financial obligations by declaring bankruptcy. Kirk’s home state is the poster child of the moment for fiscal irresponsibility. Illinois just gifted its hapless residents with a massive tax increase that will not solve the state’s financial woes, or fix the public pension system that is largely responsible for the problem (see: Live in Illinois? Get Out Now.). The tax hike, aggressively pushed by Governor Pat Quinn, failed to win a single Republican vote.
Kirk is not blazing new ground. The bankruptcy idea has been making the rounds for months. Proponents include 2012 presidential possible Newt Gingrich, who has called for a state bankruptcy bill as a means of averting federal bailouts, and to help states wash their hands of crushing pension obligations owed to highly unionized public employees.
The pension funding issue is ancient. Warnings about underfunding have circulated for decades. The following is from a 1979 General Accounting Office report on state and local pension funding:
Many State [sic] and local government pension plans are not funded on a sound actuarial basis because they are not setting aside sufficient funds to provide for estimated future benefits. Billions of dollars in unfunded liabilities have accumulated, and unless remedial steps are taken, these liabilities will increase.1
By 1992, thirteen years of letting the problem grow led only to more warnings:
Recent surveys and studies show that the contributions of many state and local governments fall short of the actuarially required amounts. … Inadequate contributions over the long term could seriously erode the tenuous financial status of some plans, especially those underfunded by large amounts.2
Seventeen years after that reminder, a Government Accountability Office report cautioned that non-pension benefits for state and local retirees, such as health care, are not generally funded, and that the liability for those benefits exceeded $530 billion.3
Now, after decades of inaction by all three levels of government, the aftermath of the recession has broken state budgets. The idea of bankruptcy protection is gaining momentum as a means of shedding pension obligations, staving off federal handouts, and gaining more favorable terms from public employee unions.
This is not a fiscal issue, nor is it a legal issue. This is a political issue, and one that is completely untenable. It is absurd to think that a state such as Illinois, run by a Democratic legislature kowtowing to public employee unions, would even consider the option of bankruptcy without ensuring that union benefits are protected first and foremost, just as they were with the Obama administration-shepherded GM bankruptcy. Will Congress rewrite the bankruptcy code so that exploring options to bankruptcy, such as massive spending cuts, is not a requirement for states? Will the federal courts direct state spending? Will extending bankruptcy protection mandate state tax increases as a prerequisite to filing? That possibility already exists when municipalities go bankrupt, because not raising taxes may demonstrate their failure to act in good faith.4
If Congress really wants to get involved in the fiscal crises of states, and to remove the union stranglehold on public employee compensation and benefits, it must do nothing. No bankruptcy bill. No bailouts, not even in the name of keeping teachers in our classrooms or police on our streets. Forcing bankruptcy so that union contracts will be rewritten is a big government solution just as easily achieved by refusing further handouts.
Some will argue that Democrats in Congress will always vote for bailouts in various guises. Those same Democrats will also block any proposal to permit state bankruptcies. If we achieve a GOP majority in both houses after the 2012 election, and that majority is willing to enforce fiscal discipline, then bailouts will not be an issue, and a bankruptcy bill will be unnecessary.
Bankruptcy sounds like a small government solution to state insolvency, but in order to work, it will necessarily extend federal control. The small government solution is for Congress to turn around and walk away. Citizens of states and municipalities will suffer, but perhaps in the wake of outrage, fiscal discipline will finally be realized.