I’ve been lurking, but been a while since I’ve been back here posting. Howdy everyone!
Was just reading a NYT article about the possibility of states declaring bankruptcy. Right now, it’s just in the works, but it’s certainly gaining traction with Republicans.
By declaring bankruptcy, the state would be able to write off any unfunded pensions or other costs. It seems like a rather extreme solution to me, but things are certainly getting pretty difficult in some states. I know that here in New Hampshire we’re facing down a deficit of nearly 900 million for the next year.
This kind of bankruptcy would affect any state worker with an unfunded pension plan, and I personally know a few that would simply hate this. I understand both sides here: the state workers expected (with good reason) that their pensions would be available to them, hell, it’s part of their contract, but at the same time, the states are facing deficits that are drowning them. The resolution of this problem, either way it goes, should prove interesting.
Here’s a report linked to in the article discussing misconceptions regarding the current state budget difficulties. I haven’t read the whole thing, but it seems to conclude that most of the problems are long term problems that can be responsibly managed without defaulting, as opposed to serious structural deficits that the states will never get out from under.
My gut reaction is that allowing states a way to shirk their obligations through bankruptcy would be a terrible idea. Not only is there a double standard between defending Wall Street payouts by arguing the sanctity of contracts while demanding ordinary workers take a pension haircut, states would almost certainly face higher borrowing costs in the bond market if they have the option of defaulting.
Good points and excellent article. Thanks. Yeah I tend to agree; declaring bankruptcy does not seem the best route to solve this crisis. Some things need to change though. Spending is not matching tax revenue, and though I know for years unfunded liabilities have been floated from year to year, it still doesn’t sit all that well with me.
I’m certainly no expert, but I’ve been following the issue, and I’m not persuaded by that article that there isn’t a major crisis looming.
I note that it’s awfully short of hard data, and long on “it’s never happened before, so it won’t happen now.” And repeatedly, they remind us that many states are fine, and not all are in trouble. Which is true as far as it goes, but the problem is that 1) the states that are in trouble are in very deep trouble, and 2) they happen to be places like California, Illinois, Ohio and New Jersey, which are all among the biggest states. It’s nice if Idaho and Delaware are in good shape, but they don’t even the scales with a fiscally insolvent Illinois.
I certainly don’t think that bankruptcy is the best answer, but I’d sure prefer it to a federal bailout of a few irresponsible jurisdictions.
It also smacks of them reaching a conclusion and then trying to justify it. For example, they say that states pay about the same amount of interest as in the 70s. Well, that’s great, but interest rates in the 70s were 5-6 times what they are now. What’s going to happen if in 3-5 years the Fed rate goes back up to 5-7% instead of the 0% it is now?
If the unfunded pension liabiltiy is an issue, one long-term solution is to go to a defined contribution plan, with the state as employer and the state employees each making their pension contribuitons with each paycheque, to a trust fund under joint adminsitration. Over time ( a long time, of course, since we’re talking about the work cycle of long-term employees and then pensioners), most state employees would have their pensions under the defined contribution plan.
The unfunded liability from the current plans would continue to increase for several years, as the employees in those plans retire, but eventually the unfunded liabilty would decrease.
Defined contribution plans have been gradually implemented by most Canadian provinces for just that reason, to decrease the unfunded liability over the long term, while respecting the employment & pension rights of their employees in the defined benefit plans.