If you’ve been reading Calitics for any length of time, you know that one of the things we often point out is that California cannot go bankrupt. Our constitution mandates bondholders be repaid before any other expenditure aside from K-12 schools. And a federal law passed in 1937 to stop Arkansas from going bankrupt ensures that while city and county governments (like Vallejo and Orange County) can declare bankruptcy, states cannot.
But that could be about to change if House Republicans get their way, according to a recent Reuters article:
Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011….
Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds.
Reuters cites a Weekly Standard article that laid out the endgame – by changing the law to allow state bankruptcies, and then forcing states to go bankrupt by cutting their funding and undermining their ability to borrow, states would be able to reopen contracts with public employees. Not only could wages and benefits then be cut for current workers, but pension benefits for retired workers would also become fair game for cuts, as has happened with retired auto workers and others whose private sector pensions have been slashed after corporate bankruptcies.
It’s no surprise that California Republicans like Issa and Nunes are leading this fight – they know that public employee benefits are one of the last vestiges of a middle-class workforce in the state, and that those unions are one of the last lines of defense against the right.
California already has one big battle come up in early 2011 over the state budget. Looks like we’ll have another in 2011 with this federal effort to force us into bankruptcy. And with Barack Obama busy caving to the right whenever possible, we’ll have to win this fight on our own.
I’m pretty sure there’s some case with New York in the title as one of the parties that says you can’t force states to pay, even the feds, relying on the tenth amendment. I don’t see how a state bk plan gets around that.
Of course, because it was a Conservative legal doctrine, what it really means is the Tenth Amendment says the feds can’t enact any progressive legislation that interferes with conservative state laws, not that it’s a general principle.
Back when Newt Gingrich was working on the Rethug 1994 takeover of the House, he boasted that what they were about was “defunding the left.” They’ve done a pretty good job of it so far. The only question is whether they will go after Social Security before or after this move. How about a pool on how long it will take Obama to cave on each demand?
This is what George Lakoff calls a slippery-slope issue. It purports to be about one thing that people can get outraged about. But the real impact will be something else. This is what conservatives did with prop. 13. And Robert is right, they’re at it again.
It’s not states that would be able to nullify contracts if states were subject to bankruptcy. United States Trust Co. of NY v. New Jersey already sets out a standard for when a state can violate a contract that it has made. An impairment of contract is constitutional if it is necessary and reasonable to a legitimate public purpose claimed by the state. What bankruptcy law applying to states would do would be to put the decisions about contracts in the hands of creditors and a bankruptcy judge. In essence, the bondholders would be in charge of the state.
The legislation as I understand it is the next step from Joe Nation’s study about pension liabilities and investment assumptions.
Most financial advisors will ask you what your tolorance for risk is. This is mostly based on your future obligations. For example, if your son or daughter is about to enter college, the investments allocated for their college should be invested very conservatively. And, there will be a low rate of return. However, if you are young and you are saving for retirement, go ahead and take some risk because you are young enough to earn it back.
So what about the risk associated with a constitutionally mandated obligation? What kind of risk profile do we want to have for the pensions of retired public employees? If you think that the obligation is very important then you want low risk (and low return). If you think the opposite, you can get higher returns.
So this is all a matter of priority. If retired public employees are important, then our risk tolorance is low, our investment income is low and their certainty of getting their pension payments should be high.
to california bankruptcy, from meg whitman to the talk shot types, over the past couple of years. i had assumed it was more of the same old talking up bond rates for banker friends, but it makes sense that the fix is in.
at least we’ve got a governor who has no illusions about what the GOP is. next year shopuld be fascinating. we beat the right by conserving energy during the enron energy crisis, we can do it again, if we’re smart, creative and disciplined.