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Broke States Need Bankruptcy Bill As No Bailouts Are Coming

January 14, 2011

Newt Gingrich is pushing for federal legislation giving financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees.

Proponents of the measure — which include Americans for Tax Reform, a Washington lobby group that fights tax increases — said the legislation is desperately needed to clear the way for struggling states to slash costs before they go belly up, and should be regarded as a preemptive move that could preclude the need for massive federal bailouts.

“It’s in the short-term and long-term interests of government workers and taxpayers to start those reforms now, rather than having to pick up the pieces after a crash landing,” ATR President Grover Nor-quist said in an interview.

While a politically unpopular move for politicians on pubic union payrolls, there needs to be a venue for state bankruptcy, so that states like California and New York and Illinois that think they’re going to come to Washington for money can be told, you know, you need to sit down with all your government employee unions and look at their health plans and their pension plans and, frankly, if they don’t want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it, and I would make the federal bankruptcy law prohibit tax increases as part of the solution, so no bankruptcy judge could impose a tax increase on the people of the states.”

Further, it should be unlawful for government to raise taxes to meet pension obligations.  If public employees are not funding their own pensions and government projections are incorrect, then pension distributions need to be lowered.  Private citizens should not be paying for public employee’s pension shortfalls especially when the citizens working in private enterprise are not getting nearly the same retirement package and are sacrificing their own retirement for another’s benefit and benefit of the politicians.

Concerns about the funded status of public pension plans are increasing because the aggregate public pension plan funding level dropped to 80% for the fiscal year ended June 30, 2009, the most recent year for which data are available, from 85% a year earlier, according to the National Association of State Retirement Administrators, Baton Rouge, La.

States whose plans have the lowest funded status ratios, also as of June 30, 2009, were Illinois, with 51%, and Kansas, Oklahoma and New Hampshire, each with 59%, according to an analysis of state pension fund annual report data by investment bank Loop Capital Markets LLC, Chicago (Pensions & Investments, Dec. 13).

Vow to fight proposal

State and union officials vow to fight the bankruptcy initiative, which they fear would undermine state autonomy and be used to reduce promised benefits to government workers.

“It is incredible to me that proponents of this portray themselves as advocates of state rights when what they’re really doing is driving states into the ground,” Mr. Loveless added. “It’s clearly in an effort to renege on public employee collective bargaining contracts.”

Need to backstop benefits

“If you don’t have this (a state bankruptcy process), you have New York, Illinois and California running off the rails because there’s no way to fix their problems … They’ve got these contracts with government workers that you can’t alter,” Mr. Norquist said.

Rep. Devin Nunes, R-Calif. — who introduced legislation late last year that would require state and local plans to disclose their finances to the U.S. Treasury.  The Nunes bill, which also would bar federal bailouts of public plans and deny a federal tax exemption for bonds issued by governmental entities that don’t comply with the new disclosure requirements, will be reintroduced on Jan. 19, Mr. House said.

Mr. House said finances of state and local governments will be a hot-button issue on Capitol Hill this year. “The whole area of how to deal with soaring debt at all levels of government and the consequences to the national economy will be the subject of hearings in multiple committees,” Mr. House said.

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