Could States Kill their Debt and Public Sector Unions at the Same Time?

| December 9, 2010 | 2 Replies

James Pethokoukis thinks he’s sussed out a very clever game being played right now by Congressional Republicans. If he’s right, and they pull it off, it could solve two of the biggest problems our country is facing: underfunded public employee compensation and public sector unions.

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

This is an exceedingly clever scheme. If it works, and I can’t stress that “if” enough because you know darned well the SEIU will fight it with every dime they’ve managed to heist from their members and the American taxpayer, states will be able to make a huge chunk of their debt disappear very quickly. They’ll also be able to instantly destroy the immense amount of influence public sector unions have on state budgets.

The problem is that the plan has at least two large moving parts that have to pan out at about the same time. If Congress shuts down the BAB program, but doesn’t get a way for states to declare bankruptcy, the plan won’t work. Worse, if they get the bankruptcy option but the BAB program stays alive then the chance that a state can withstand the public sector unions’ inevitable offensive against bankruptcy is almost zero. Why declare bankruptcy when the bond option is available?

If Pethokoukis’ sources are right, and the GOP are going to try this, then we need to get behind it as much as we’ve gotten behind anything in the past few years. Our efforts could pay off handsomely if it works.

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Category: The Economy and Your Money

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