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Federal Legislation Allowing States to go Bankrupt!!
Posted On: Jan 12, 2011

Gingrich seeks bill allowing state bankruptcy to avert bailouts

Move afoot to help states escape benefit obligations

By Doug Halonen
January 10, 2011, 12:01 AM ET

Former House Speaker and possible GOP presidential contender Newt Gingrich is pushing for federal legislation giving financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees.

Proponents of the measure — which include Americans for Tax Reform, a Washington lobby group that fights tax increases — said the legislation is desperately needed to clear the way for struggling states to slash costs before they go belly up, and should be regarded as a preemptive move that could preclude the need for massive federal bailouts.

“It's in the short-term and long-term interests of government workers and taxpayers to start those reforms now, rather than having to pick up the pieces after a crash landing,” ATR President Grover Nor-quist said in an interview.

“We are working with people inside and outside of Congress on this issue,” said Joe DeSantis, a spokes-man for Mr. Gingrich, whom Mr. DeSantis said is considering a bid to be the Republican presidential candidate in 2012.

Mr. Gingrich discussed the proposal in a Nov. 11 speech before the Institute for Policy Innovation, an anti-big-government group based in Lewisville, Texas. According to a transcript of the speech on Mr. Gingrich's website,, he said: “I ... 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.”

Concerns about the funded status of public pension plans are increasing because the aggregate public pension plan funding level dropped to 80% for the fiscal year ended June 30, 2009, the most recent year for which data are available, from 85% a year earlier, according to the National Association of State Retirement Administrators, Baton Rouge, La.

States whose plans have the lowest funded status ratios, also as of June 30, 2009, were Illinois, with 51%, and Kansas, Oklahoma and New Hampshire, each with 59%, according to an analysis of state pension fund annual report data by investment bank Loop Capital Markets LLC, Chicago (Pensions & Investments, Dec. 13).

Vow to fight proposal

State and union officials vow to fight the bankruptcy initiative, which they fear would undermine state autonomy and be used to reduce promised benefits to government workers.

“I am unaware of any public pension plan that is requesting federal assistance,” said Keith Brainard, NASRA research director.

“Exaggerated reports on the financial condition of public pension plans are being used as a scare tactic to justify federal intervention,” Mr. Brainard added.

Said Mark McCullough, a spokesman for the Service Employees International Union, Washington: “This is another right-wing attack on behalf of their (the GOP's) anti-middle class, big-business donor base.

“It would amount to not just another attack on working families, but an attack on everyone from investors to retirees who would see the economy reel from the ripple effects of state bankruptcy as they pursue the goal of making American workers expect no better pay or benefits than workers in the developing world.”

So far, proponents of the legislation said they have not yet recruited a congressional sponsor for the proposed measure. “We're still shopping for the guy who is going to carry it,” Mr. Norquist said.

Nonetheless, union executives are concerned that the proposal — which has been promoted on conservative websites recently — is part of a well-orchestrated and hitherto underground campaign now surfacing as Republicans settle into leadership positions in the new Congress.

“This idea carries major negative financial implications for the states, their creditors and the companies that do business with them,” said Charles Loveless, director of legislation for the American Federation of State, County and Municipal Employees, Washington. “A state going into bankruptcy would send shock waves through the states and could very well undermine our fragile national economic recovery,” he said.

“It is incredible to me that proponents of this portray themselves as advocates of state rights when what they're really doing is driving states into the ground,” Mr. Loveless added. “It's clearly in an effort to renege on public employee collective bargaining contracts.”

Need to backstop benefits

The bankruptcy proposal also raised concerns in some corners because there's no agency to back up the pension benefits of state workers the way the Pension Benefit Guaranty Corp. backstops benefits for participants in corporate-sponsored pension plans, said Babette Ceccotti, a partner at Cohen, Weiss and Simon LLP, a New York law firm that specializes in labor and employee benefit issues.

Proponents of the state bankruptcy legislation “are proposing the cuts, but not a safety net for people's retirement security,” she said.

But Mr. Norquist said that, assuming the proposal becomes law, not every state would file for bankruptcy — a right that municipal governments already have under Chapter 9 of the U.S. Bankruptcy Code.

“If you don't have this (a state bankruptcy process), you have New York, Illinois and California running off the rails because there's no way to fix their problems ... They've got these contracts with government workers that you can't alter,” Mr. Norquist said.

He said restructuring benefit obligations doesn't necessarily mean cutting the amount of money a retiree gets; it could involve freezing a public defined benefit plan and enrolling new employees in a defined contribution plan.

Rep. Devin Nunes, R-Calif. — who introduced legislation late last year that would require state and local plans to disclose their finances to the U.S. Treasury — had no immediate comment on the bankruptcy proposal, said his spokesman, Andrew House. “He's aware of the proposal, but has yet to take a public position on the issue,” Mr. House said.

The Nunes bill, which also would bar federal bailouts of public plans and deny a federal tax exemption for bonds issued by governmental entities that don't comply with the new disclosure requirements, will be reintroduced on Jan. 19, Mr. House said.

Mr. House said finances of state and local governments will be a hot-button issue on Capitol Hill this year. “The whole area of how to deal with soaring debt at all levels of government and the consequences to the national economy will be the subject of hearings in multiple committees,” Mr. House said.

Rep. Paul Ryan, R-Wis., who co-sponsored Mr. Nunes' bill, and became chairman of the House Budget Committee earlier this month, was also mum on the bankruptcy proposal.

“Congressman Ryan certainly shares the concerns that state governments across the country are failing to live within their means, just as he has expressed continued concern for Washington's fiscal recklessness,” said a spokesman for the Wisconsin lawmaker. “But the congressman has yet to decide how to address the state issues.”

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