Letting States Declare
Bankruptcy Isn't a Dumb Idea
Bankruptcy Isn't a Dumb Idea
The federal government needs to help states pull through the
pandemic, not to make up for irresponsible decisions on pensions.
pandemic, not to make up for irresponsible decisions on pensions.
By Ramesh Ponnuru
Senate majority leader Mitch McConnell has not been getting
good reviews for his suggestion that state governments be allowed to declare
bankruptcy rather than receive federal aid to “bail out” their pensions.
good reviews for his suggestion that state governments be allowed to declare
bankruptcy rather than receive federal aid to “bail out” their pensions.
Representative Pete King of New York called McConnell “the
Marie Antoinette of the Senate.” Maryland Governor Larry Hogan said that
McConnell either regretted his comments or would come to regret them.
Marie Antoinette of the Senate.” Maryland Governor Larry Hogan said that
McConnell either regretted his comments or would come to regret them.
And that’s just McConnell’s fellow Republicans. New York
Governor Andrew Cuomo, a Democrat, said McConnell had made “one of the dumbest statements
of all time.” Journalistic commentary was similar, with Vanity Fair blasting
McConnell’s “political nihilism.”
Governor Andrew Cuomo, a Democrat, said McConnell had made “one of the dumbest statements
of all time.” Journalistic commentary was similar, with Vanity Fair blasting
McConnell’s “political nihilism.”
But if you ignore the invective and listen to the points
each side is making, you will see that both McConnell and his critics are largely correct — and that they’re talking about different things.
each side is making, you will see that both McConnell and his critics are largely correct — and that they’re talking about different things.
What the critics get
right is that the states’ current fiscal crisis is not primarily a result
of their irresponsibility. We don’t want the states to raise taxes and slash
spending to balance their budgets in the middle of a public-health and economic
catastrophe. The federal government, which has greater borrowing capacity,
should provide them with relief.
right is that the states’ current fiscal crisis is not primarily a result
of their irresponsibility. We don’t want the states to raise taxes and slash
spending to balance their budgets in the middle of a public-health and economic
catastrophe. The federal government, which has greater borrowing capacity,
should provide them with relief.
McConnell’s stated concern is that the federal government
might pick up the tab for states’ mismanagement of their pensions rather than for the pandemic. Some states have made exorbitant
promises to their employees over the years without providing adequate funding.
They made up the difference, on paper, by projecting unrealistically high
returns on pension investments.
might pick up the tab for states’ mismanagement of their pensions rather than for the pandemic. Some states have made exorbitant
promises to their employees over the years without providing adequate funding.
They made up the difference, on paper, by projecting unrealistically high
returns on pension investments.
The Federal Reserve, applying a better projection of
returns, estimates that pensions are underfunded by $4 trillion. McConnell is right to think that it
would be unfair to make Florida’s teachers and firefighters pay for benefits
for their counterparts in Illinois, and unwise to create an incentive for
further irresponsibility by state officials.
returns, estimates that pensions are underfunded by $4 trillion. McConnell is right to think that it
would be unfair to make Florida’s teachers and firefighters pay for benefits
for their counterparts in Illinois, and unwise to create an incentive for
further irresponsibility by state officials.
The president of the Illinois state Senate has already asked
for $10 billion in federal help with the state’s pensions. McConnell wants to
prevent states from using the coronavirus crisis as a pretext for a wealth
transfer that enables them to keep avoiding hard choices.
for $10 billion in federal help with the state’s pensions. McConnell wants to
prevent states from using the coronavirus crisis as a pretext for a wealth
transfer that enables them to keep avoiding hard choices.
Emotions run high when billions are on the line, and the
controversy turned hotter because McConnell’s comments came in response to
questions about funds for Democratic-leaning states. Summarizing one of his
interviews in a press release, his office highlighted the remarks about
bankruptcy under the heading “blue-state bailouts.” That may have been what
prompted Cuomo to shoot back that New York sends more money to the federal
government than it gets back, while the reverse is true of McConnell’s home
state of Kentucky.
controversy turned hotter because McConnell’s comments came in response to
questions about funds for Democratic-leaning states. Summarizing one of his
interviews in a press release, his office highlighted the remarks about
bankruptcy under the heading “blue-state bailouts.” That may have been what
prompted Cuomo to shoot back that New York sends more money to the federal
government than it gets back, while the reverse is true of McConnell’s home
state of Kentucky.
But Cuomo’s shot isn’t really an answer to McConnell. The
fact that federal taxation is progressive — the kind of policy that explains
the pattern of donor and recipient states, and that Cuomo himself favors — does
nothing to justify nationalizing
state-pension shortfalls.
fact that federal taxation is progressive — the kind of policy that explains
the pattern of donor and recipient states, and that Cuomo himself favors — does
nothing to justify nationalizing
state-pension shortfalls.
Federal law currently makes no provision for states to
re-organize their commitments through bankruptcy proceedings. Creating one
would not keep the coronavirus from crushing state budgets. It could, however,
prevent, or at least limit, future federal bailouts for state mismanagement of
pensions.
re-organize their commitments through bankruptcy proceedings. Creating one
would not keep the coronavirus from crushing state budgets. It could, however,
prevent, or at least limit, future federal bailouts for state mismanagement of
pensions.
David Skeel, a law professor at the University of
Pennsylvania and the leading academic proponent of a bankruptcy option for
states, argues that it would also improve state decision-making. Public-sector
unions might push for more up-front funding for pensions, for example, if
unfunded benefit promises run a risk of disappearing in bankruptcy proceedings.
Pennsylvania and the leading academic proponent of a bankruptcy option for
states, argues that it would also improve state decision-making. Public-sector
unions might push for more up-front funding for pensions, for example, if
unfunded benefit promises run a risk of disappearing in bankruptcy proceedings.
Some of the arguments against state bankruptcy, such as the
claim that it inevitably favors bondholders over everyone else, are spurious.
The idea would, however, face constitutional challenges, as would other
proposals to condition federal aid on state reforms. In the Supreme Court’s
2012 Obamacare decision, seven justices held that the federal government
could not make states offers that amounted to coercion. “We’ll help you if
you change your pensions’ accounting standards or file for bankruptcy” might
count.
claim that it inevitably favors bondholders over everyone else, are spurious.
The idea would, however, face constitutional challenges, as would other
proposals to condition federal aid on state reforms. In the Supreme Court’s
2012 Obamacare decision, seven justices held that the federal government
could not make states offers that amounted to coercion. “We’ll help you if
you change your pensions’ accounting standards or file for bankruptcy” might
count.
But the pros and cons of bankruptcy are, at the moment,
somewhat beside the point. As the reaction to McConnell’s comments suggests,
the Democratic House is extremely unlikely to agree to create a bankruptcy
option this year. Skeel tells me that McConnell’s office has not contacted him.
That’s a signal that he does not have bankruptcy legislation in mind.
somewhat beside the point. As the reaction to McConnell’s comments suggests,
the Democratic House is extremely unlikely to agree to create a bankruptcy
option this year. Skeel tells me that McConnell’s office has not contacted him.
That’s a signal that he does not have bankruptcy legislation in mind.
The purpose served by McConnell’s remarks is to establish
that his tolerance for aid to states has limits and that he will be resisting
any effort to exploit the crisis to secure a general bailout for spendthrift states. If McConnell and other
Republicans are overzealous about this point, they could skimp on needed
funding for state governments. But for all the indignation it has aroused, the
point itself is a valid one.
that his tolerance for aid to states has limits and that he will be resisting
any effort to exploit the crisis to secure a general bailout for spendthrift states. If McConnell and other
Republicans are overzealous about this point, they could skimp on needed
funding for state governments. But for all the indignation it has aroused, the
point itself is a valid one.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Ramesh Ponnuru at rponnuru@bloomberg.net
To contact the editor responsible for this story:
Tobin Harshaw at tharshaw@bloomberg.net
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