As I've mentioned before, the prospects of a federal bailout for those states that run out of money is slim to none. Senator John McCain laughed in response to receiving that question in an interview on Fox News Channel. More recently, House Majority Leader Eric Cantor (R-Virginia) stated that under no circumstances will Congress consider a federal bailout for cash-strapped states. Also, House Budget Committee Chairman Paul Ryan (R-Wisconsin) offered the following assessment: "Should taxpayers in Indiana who have paid their bills on time, who have done their job fiscally be bailing out Californians who haven't? No. That's a moral hazard that we are not interested in creating."
Given the sentiment on Capitol Hill, what then are states like California, Illinois, New York, and New Jersey going to do if they reach a point where they can no longer pay their bills? The answer may lie in a controversial plan being discussed among several lawmakers that will allow these states to declare bankruptcy. Current bankruptcy law allows municipalities, but not states, to seek protection in federal bankruptcy court. Extending the same option to states will allow them to escape the crushing debts they have incurred as the result of excessive borrowing and spending. But is this really the best way to go?
There are strong advocates on both sides of the issue. House Republicans and Senators from both parties are interested in pursuing this option, with nudging from high-profile bankruptcy lawyers and even former House speaker, Newt Gingrich, a potential Republican presidential candidate. But they are treading very carefully, since it would be difficult to get a bill through Congress given the constitutional hurdles and the complexities of bankruptcy law. They are also cognizant of the fact that fears of even the discussion of such a law could make the states’ problems worse by discouraging investors.
On the other side, you have Democrats who are concerned about pensions for public employees and retirees, bond investors who fear that they'll wind up at the end of the line as unsecured creditors, and even former Bush adviser, Karl Rove. Allowing a state to declare bankruptcy will enable it to alter contractual obligations to public employees and retirees, dramatically decreasing their pensions. Thus it comes as no surprise that people like Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees, are mounting a massive effort to lobby against it. Karl Rove has stated publicly that bankruptcy should not be considered until all other options have been exhausted. Rove believes that bankruptcy will make it much harder for states to borrow money because lenders will fear they might never get paid back.
Make no mistake about it; allowing the states to declare bankruptcy will have dire consequences for stakeholders. To understand this fully, look no further than the town of Prichard, Alabama. Prichard is the first known municipality in the United States to declare bankruptcy, having done so in 2009. As a result, they stopped sending pension checks to retirees. The town was sued, but to no avail. How can a court force a town to pay out pensions if there is no money to do so? That left almost 200 retirees with no income, but in some cases, a tragic outcome.
Nettie Banks, 68, a retired Prichard police and fire dispatcher, was forced to file for bankruptcy herself. Alfred Arnold, a 66-year-old retired fire captain, had to return to work as a shopping mall security guard in an effort to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport. But far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. “When they found him, he had no electricity and no running water in his house,” said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.”
Could this catastrophe occur on a grander scale? Does the situation in Prichard, Alabama offer a glimpse into the future for several U.S. states? If so, then prepare for descent into a maelstrom of uncertainty, crisis, and pandemonium. But there is still time to save the ship from sinking, though states will need to endure deep, painful budget cuts in order to do so. They'll have to sacrifice educational programs, employee benefits, state parks and recreation, and so many other things that state residents hold dear. Clearly, this route is the lesser of two evils, and one that governors will pursue if they have any common sense at all.
It continues to boggle my mind that public employees in New Jersey lash out at Governor Christie and secretly wish for his sudden and painful death. Do they not understand what is going on? How can it be that tens of thousands of people are so engrossed in their own needs and wants that they are completely oblivious to how close their state is to the verge of bankruptcy? Well, I've got news for them. If they don't get on board and start supporting the governor's agenda, then they could wind up like Nettie Banks, Alfred Arnold, Eddie Ragland, or worst of all, Prichard's retired fire marshal who died all alone in his home. In order to avoid going down this road, massive spending cuts and major concessions from the public employee unions will be necessary. In the end, let's hope and pray that sanity prevails so that New Jersey, as well as all the other cash-strapped states, doesn't suffer the same fate as Prichard.
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