Pros and Cons of A Federal Law Allowing State Bankruptcies

The Wall Street Journal has recently printed two diametrically opposed viewpoints on the subject of passing a federal law allowing states to declare bankruptcy.

David Skeel, a University of Pennsylvania law professor, took the 'pro' side of the question, whereas E.J. McMahon of the Manhattan Institute took the 'con side.

Skeel's piece appeared first, and I found it quite convincing. He focused on the use of such a law to place problematic state and municipal union contracts into a court's jurisdiction, in order that they could be set aside. Skeel claims that unions have the power to block renegotiation of such contracts, which is why a court-supervised bankruptcy is useful.

McMahon, on the other hand, contends that a single judge shouldn't be doing what a governor is already in a position to effect. Specifically, he suggests that governors already can take steps to curb union powers and limit their collective bargaining powers, and that tossing the problem to the courts will simply alleviate pressure on unions by elected officials. Further, he questions the legality of a state bankruptcy law on teacher, police and firefighters unions whose members work for municipalities. He goes on to suggest, without empirical evidence,

"More than half of all state expenditures go to Medicaid, K-12 public school aid and other transfer payments. These are the areas that have been the prime source of unsustainable and unaffordable spending growth in state budgets."

I frankly don't believe these contentions. Yet, absent those arguments, the rest of McMahon's case actually makes sense.

Reading both editorials, I find now find myself wary of Skeel's position. But the real danger seems that, without a state bankruptcy option, many citizens worry that the federal government will simply bail out problem states. That's clearly not a good idea. If the only way that can be precluded is by way of state bankruptcies, so be it.

That is, I believe, really where Skeel and McMahon would disagree, were they debating in person. McMahon feels that there's sufficient power in state governments now to cut spending, while Skeel feels that many states will still resist those cuts, and appeal for federal bailouts.

As I've written in several prior posts, I don't think even the constitutionally-protected public pensions can ultimately survive the coming state and local budget and public sector union benefits crisis. It may take amendments to some states' constitutions, but I really believe the entire concept of public unions and their lush benefit packages, with minimal employee input, have to be revised and drastically cut, or our nation will sink into a mire of unmanageable, unpayable pension obligations in the near future.