Bankruptcy is not the pot of gold at the end of the rainbow. But to read some of the advocacy in behalf of allowing states to go bankrupt you might think so. Want to break a labor contract why then go bankrupt. Want to reduce pension benefits why then go bankrupt.
Bankruptcy is used by families and businesses when either their expenses exceed their incomes or more likely when their debts exceed their assets. As big as California’s debt is there are a lot more assets to secure it. Regarding expenses, most all of the California budget can be adjusted downward if there is political willpower to do so. California does not qualify for bankruptcy.
The real problem is political willpower. As long as solutions exist short of bankruptcy whether it is cutting expenses or even raising taxes no bankruptcy judge is going to enter that thicket.
For those who honor the federal Constitution there is a big reason that states do not file for bankruptcy. They are sovereign entities who cannot cede their sovereignty to the Federal government. It is disappointing to hear so many conservatives ignoring the consequences of a state submitting its powers to a federal judge. If states are admitted under federal bankruptcy laws then America becomes a united state and no longer is the United States.
Even if one gets by the constitutional question there is the practical matter of what a judge might do. I suggest reading the court orders against the state of California in the prisons health lawsuit for an idea of how a judge could make things even worse for Californians.
Yes, a judge could order labor contracts to be torn up. But then the same judge would order the government and the unions to negotiate new contracts for his approval and the unions would standing to give the judge their side of the story. I doubt if any judge would approve below market contracts unilaterally. Any savings that might be generated through court could also occur with a Governor who determines fair wages and then makes that the first, last, and final offer.
There is a bigger legal cloud over pensions and whether or not a federal bankruptcy court would ever want to order a change in benefits or a change in contributions.. Federal law requires pension benefit plans to be honored and sets up a government agency to guarantee this for employees of private businesses. In the largest municipal bankruptcy case in California recently in Vallejo, the city choose to honor the pension plan and instead proposed a re-organization plan that cut salaries in the labor contracts and discounted heavily all other creditors. So the city is living with $195 million in pension liabilities rather than risk a worse outcome in the court. However, by reducing the salaries of all current and future workers that are getting a handle on making sure those pension liabilities do not increase.
SIDEBAR: There used to be an understanding that while government employees were paid at or below market that their risk of layoff or even termination was so tiny that it was a fair bargain. I am open either way to this understanding. But if my government employees are paid above market then I should be able to terminate them when fiscal needs demand it.
Again this is not something that a bankruptcy judge can do. In fact one of the attorneys for Vallejo case has written a paper that concludes: “If the reader takes away only one thing from this pamphlet, it should be that filing for bankruptcy protection under chapter 9 should be considered a last resort, to be effected only after every effort has been made to avoid it. As we discuss below, there are several significant downsides to such a filing, and in the end, the problems that brought the municipality to the point of filing will have to be solved anyway, so it is far better to resolve them, if possible, outside of bankruptcy.”
California is an incredibly wealthy state. Even with its generous welfare system there are millions of adults ready willing and able to work hard for themselves and their families and when they do they will pay some of the nation’s highest taxes.. California is also the home to billions of capital that could be invested in California businesses given the right economic climate. Even though revenue to state government is down from the peak, California’s 2011-12 tax take still ranks in the top ten best years of revenue in California’s history.
With bankruptcy off the table, it all comes back to the willpower of the Governor and the Legislature to cut expenses in order to live within their income and to enact reforms that will balance the budget for years to come. Our future depends on this.