NCPA - National Center for Policy Analysis

Bankruptcy Is Not the Only Option for States

January 28, 2011

As states struggle with enormous deficits and exploding pension costs, some analysts are urging Congress to enact a law enabling states to declare bankruptcy the way municipalities can under Chapter 9 of the federal bankruptcy code.  But a state bankruptcy provision could create more problems than it solves, says E.J. McMahon, a senior fellow at the Manhattan Institute.

Bankruptcy proponents understandably worry that states such as California and Illinois are so deep in the hole they may end up petitioning Congress for federal relief.  To forestall this possibility, the argument goes, even the threat of bankruptcy would give governors and legislators a powerful new weapon for forcing concessions from recalcitrant public employee unions.  Yet state officials committed to cutting costs already have options for putting the squeeze on their unions.

  • One is the threat of mass layoffs.
  • Governors and legislators also can prospectively freeze wages or even cut them through involuntary furloughs, as California and several other states did over the past two years.
  • By reopening their collective bargaining statutes, state officials can narrow the terms of future negotiations -- restricting compulsory arbitration, say, or taking retiree health insurance off the table and making it a management prerogative.
  • They can also pressure unions by revoking privileges such as the employer-collected dues checkoff, or even eliminate future union contracts.

The biggest state budget gaps will never be closed until politicians use the tools they already have to challenge the overweening power of public employee unions, says McMahon. 

Source: E.J. McMahon, "State Bankruptcy Is a Bad Idea," Wall Street Journal, January 24, 2011.

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