Why Bailouts? Let States Go Broke

Wednesday, 11 Aug 2010 11:21 AM

 

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Federal Band-Aids won't cover the fiscal problems of such states as New York, California, Michigan, and Connecticut forever.

State bankruptcy and fundamental restructuring of state and local finance — and labor relations — is at hand.

Take Connecticut. In the current fiscal year, $2 billion in federal subsidies have helped tide it over the recession — a hefty share of its $15 billion budget. But these infusions are one-shot grants, renewed only if Congress acts affirmatively to do so. Other states depend on similar manifestations of federal largess.

In Washington, the House is set to pass a $26 billion aid package this week — fresh federal aid amounting to about 2 percent of state and local spending. But if the Republicans win control of Congress this fall, it is hard to see any legislative willingness to renew these subsidies.

Instead, GOP lawmakers will point to the examples of New Jersey, Virginia and Indiana, where conservative governors have slashed spending to avoid tax hikes. In Virginia, Gov. Bob McDonnell has reduced spending to pre-2006 levels.

If Congress fails to renew its subsidies, the more profligate states will face cash shortfalls in the current fiscal year. They'll threaten school closures, prison releases, and all manner of mayhem if their subsidies aren't renewed. But the Republicans in Washington are likely to refuse, asking why the responsible states should bail out the spendthrifts in Albany, Sacramento, Lansing, and Hartford.

At that point, the bond markets will start eyeing state (and local) balance sheets more critically, demanding higher rates or even refusing to lend. California won't be the only one trying to get by on IOUs.

But beyond this tale of woe lies a golden opportunity to reform state governments and redress the imbalance of power between elected officials and public-employee unions.

Absent endless federal subsidies, states will simply no longer be able to afford to give the unions everything that they want. And governors — many of them newly elected Republicans — will realize that they can't even afford to honor agreements their big-spending predecessors OK'd.

The GOP Congress should then amend the federal bankruptcy law to provide for a way — now absent — for states to declare bankruptcy. (Municipalities can do so under current law, but states have no such relief.)

Here's the key: The reforms must require that states abrogate their public-employee union agreements in the bankruptcy process, just as private corporations like Delta and Chrysler have done. The wage hikes, the work rules, the pension plans all go out the window.

Few states will have the starch to cut benefits for those now receiving them. But most will cut pensions for current workers and all will slice them for future employees.

Even the threat will be a powerful bargaining tool. And beyond the fiscal adjustments, the power of the municipal- and public-employee unions will be broken.

Voters throughout America will loudly applaud if Congress tells the profligate states, "Work it out on your own. Don't look to us for a bailout."

President Obama could veto the bankruptcy reforms but a Republican Congress need do nothing to assist states in their plight until he relents. All of the political and financial leverage will be on Congress' side.

The result could be the greatest revolution in state and local governance since public-employee unions came on the scene. The public and the voters would get their local governments back, and the grip of public unions will be weakened. It would be the state and local equivalent of President Ronald Reagan's tough stand against the air-traffic controllers' strike.

Politically, the unions that fund and fuel the Democratic Party would be emasculated, dramatically shifting the national balance of power.

Former British Prime Minister Margaret Thatcher's prediction about socialism will have come true for America's states: "Sooner or later, they run out of other peoples' money."

© Dick Morris & Eileen McGann

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