States In The Red, Looking For A Way Out

As even a casual follower of the news knows, many states are struggling with huge budget problems.  Ohio is one of them.  Usually the problems are the result of declining tax revenues, increased government spending and support obligations, and the fact that bills are starting to come due on grossly underfunded state employee pension and retirement plans.

States are taking different approaches to their predicament.  Illinois recently enacted huge increases to its individual and corporate income taxesCalifornia has declared a state of fiscal emergency.  Some states have focused exclusively on cutting spending.  And, it now appears, other states have quietly gone to Congress to explore the possibility of either a federal bailout or changes in the law to allow states to declare bankruptcy.  In these Tea Party days, there doesn’t seem to be much appetite for bailouts — especially for states that seem to have behaved irresponsibly with their budgeting decisions and can’t be trusted to behave responsibly in the future.  So, the “bankruptcy option” evidently is being seriously explored as a way to allow states to avoid their pension obligations.

I’m opposed to a federal bailout of the states.  I’m also opposed to any change in the law to facilitate states wiping out their debts through a bankruptcy-type process.  I think the bankruptcy option would be bad policy for two reasons.  First, I think such an approach is not fair to people who have agreements with the states that would be affected by a bankruptcy process.  State employees who have worked for years on the understanding that they will receive a pension should not be deprived of their pension payments.  For those workers, the pension was part of the deal, they have relied on the pension in their retirement planning, and it would be unfair for states to now renege on the deal.  Second, bankruptcy would affect not only state workers with pensions, but also all people who have contracts with the state, all people who purchases state bonds and debt instruments, and all others who do business with the states.  It would be a drastic step that would, I think, forever affect the state’s credit rating and investor confidence in government securities generally.  States that have been responsible in their budgeting and spending would be tarred, too, and would have to endure higher interest rates on their own borrowing as a result.  Obviously, neither of those results would be welcome.

The solution for states that are in a budget bind should lie in the state, itself, making the tough choices and difficult changes necessary to get their fiscal houses in order.  Cut spending.  Eliminate programs that aren’t essential.  Sell state property and assets.  Negotiate changes  to future pension obligations and eliminate pensions for newly hired employees.  Change laws that require automatic escalations in pension payments.  Explore users fees as additional revenue sources.  But don’t come to Uncle Sam for a bailout, and don’t take a bankruptcy option that could leave retirees high and dry and cripple state credit ratings for decades to come.

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