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Townhall...
State Bankruptcy: The
Worst Idea Yet
By Jim Gilmore
We are witnessing unprecedented clashes and escalating political
rhetoric between cash-starved state governments and their public
service unions.
The conflict has yielded the worst notion yet among an array of
increasingly painful potential solutions – declaring state bankruptcy,
among other reasons, to escape the onerous bonds of contracts and
accumulated promises made by multiple generations of politicians of
both parties.
As a former Virginia governor, my advice is to consign that particular
idea to the cutting room floor. In harsh reality, bankruptcy would
likely cost taxpayers more over time than tax hikes or unaffordable
public union contracts. And it would put the final financial
decision-making in the hands of a federal judge whose persuasions and
ultimate directives would be entirely unknown.
In the real world of government and finance, well-rated state and
municipal bonds are a safe harbor for retirees, the elderly and small
investors who are desperate today for as much certainty as they can
find.
In 2010, investors seeking that certainty invested more that $84
billion in state and municipal bond mutual funds. The creation and
development of mechanisms for states to go bankrupt, and ask a federal
judge for permission to default, could prompt painful and costly credit
rating downgrades that hurt all classes of investors, including working
men and women holding 401 (k) plans that have already been beaten down.
By being trustworthy, creditworthy borrowers, responsible states and
municipalities promote certainty for people who need it. They promote
assurance for managers overseeing the nation’s retirement funds,
pensions, mutual funds and money market funds on behalf of individuals.
The fact is it would cost any state an exorbitant amount of money in
the long term to default on its investors through tactical bankruptcy
engineered to escape union contracts or creditors. Even if anybody were
willing to lend anything at all in the future, the required interest
rates would be astronomical. Eventually, draconian spending cuts or
dramatically higher taxes would likely be needed to pay that debt.
Penalties on state governments fresh off a tactical bankruptcy and the
citizens they serve would be severe.
Some say we should simply keep on paying for unaffordable public union
contracts and obligations to other creditors. That’s not viable. If gas
prices continue to rise, burdens on mainstream wage earners would be
magnified by tax increases. People of modest means, and even those in
the middle class, would only be more pressured by a tax hike in a
high-price energy environment. Our anemic economic recovery could very
well turn into a double-dip recession with only deeper and more
prolonged unemployment. In short, we don’t have the money.
There is only one viable path. And that is for political leaders who
have now been elected across the country with the mandate to make tough
choices to begin their hard work. Unfortunately, this will have to be
done regardless of whether the public unions come to the negotiating
table or a handful of legislators show up for a vote. Our country has
promised too much, spent too much and borrowed too much. At any time,
creditors could take these difficult decisions out of our hands and
make those decisions even more painful for all.
So here’s some sound advice:
Public employee unions should lose the high-octane rhetoric. Put down
the drums. Ditch the phony sick slips. Quickly let the sights and
sounds of Madison, Wisconsin, recede from the public’s mind and
consciousness. Approach negotiations in a serious, thoughtful spirit of
shared sacrifice and a realistic, open-minded appraisal of the tough
financial times faced by most taxpayers. Many will not be with you.
Political leaders, meanwhile, should be ready to work together in a
bipartisan manner, make principled arguments and show up for the vote.
Bipartisanship used to be a nice sound bite. In times like these, it
will be our only way forward.
Government must make the same tough decisions that everyday Americans
have had to make to work our way out of this terrible challenge. Even
the toughest problems can be solved by leaders working in an honorable
and trustworthy way that voters and the public can trust.
Read it at Townhall
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