The States are burdened with high deficits that cannot be lowered without additional sources of revenue. Every state in the union is battling revenue shortfalls and escalating public pension liabilities. Many States are cutting programs and trimming the ranks of their public employees. To make matters worse, in many states like California, the public is opposed to tax increases, further tying the hands of the States’ legislatures.
But most experts and nonpartisan budget projections agree that for many States road to financial solvency cannot be achieved by cuts alone. For example, California could fire every state employee and still come up short to fill its whopping budget deficit. For some States, the budget deficits are structural problems that stem from a chronic mismatch between revenues and expenditures. Once again, California wins the grand prize when it comes to structural budget short falls.
Regardless, everyone agrees that many states will have a hard time closing their budget gaps and will try to look elsewhere for additional funds. Historically, States have gone to the open markets and raised additional revenues through the sale of state bonds. In the good old days before the great recession, States borrowed heavily at preferred rates and used those funds to balance their budgets. After the recent near collapse of the financial markets, many States are finding it more difficult to borrow money by selling their bonds. Some States such as California have seen their credit ratings down graded by rating agencies, making it tough to find eager takers for their debt instruments through public offering.
Now many in Washington worry that States will come calling, demanding a federal bail out. After all, federal government bailed out corporations and Wall Street investment banks. So, why not a federal bail out for the States? The size of the collective States’ budget deficits is too enormous. And many States have structural budget short falls that cannot be remedied by a one time federal aid. Therefore, many Washington insiders in both parties are opposed to any form of federal bail out for the States.
Recently, Newt Gingrich and some conservative Washington think tanks have begun floating the idea of amending the federal bankruptcy code, allowing States to file for bankruptcy protection.
In his recent speech before the conservative group “ Real Action”, Gingrich said: “I think we just have to be honest and clear about this and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy, so that states like California and New York and Illinois that think they’re going to come to Washington for money can be told, you know, you need to sit down with all your government employee unions and look at their health plans and their pension plans and frankly if they don’t want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it, and I would make the federal bankruptcy law prohibit tax increases as part of the solution, so no bankruptcy judge could impose a tax increase on the people of the states”. Like Gingrich, anti-tax conservatives like Grover Norquist and Patrick Gleason, both from the conservative Washington think thank, “Americans for Tax Reform” expressed support for States’ bankruptcy option and hailed it as prudent solution to a chronic problem.
Under the existing bankruptcy rules, bankruptcy protection is only available to municipalities. States are forbidden to file bankruptcy. Although, Republicans in the Senate are more on board with the idea of bankruptcy protection for the States, many in the House are opposed to the idea, making the passage of such amendment to the bankruptcy code unlikely in the near future.
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