Bankruptcy for States?

Troubled by crushing debt? Overwhelmed by pensions and post-retiree health care costs? Unable to bargain with public sector unions? Well, there may be a new solution on the horizon, bankruptcy for states.

We have written plenty about Chapter 9, the Federal law that governs municipal bankruptcy. In order to preserve the balance of power between the Federal government and the states, Chapter 9 allows states to act as gatekeepers: they can permit municipalities to file without restriction, limit filing to certain types of local governments, place hurdles, or outright prohibit filing altogether. Right now 19 states permit their municipalities to file, so a new Federal law permitting states to file would create a situation in which 30 states that currently prohibit municipal bankruptcy would enjoy the right to file.

Of course this proposal raises Constitutional issues. One observer says that so long as state bankruptcy would be treated as municipal bankruptcy-that the governing body could not be forced into a filing and the courts could not dictate tax increases or service cuts-then it would be permissible. But states would quickly run into the "insolvency test" in which the courts would be able to dismiss a filing if it were determined that tax hikes or service cuts and efficiencies could be achieved. Difficult to do for a City like Pittsburgh with a $400 million plus budget; even harder to do for a state like Pennsylvania with a $28 billion budget. If the courts dismissed state filings based on that test, then it would be back to square one of negotiating and cutting outside the oversight of the judge.

Federalizing Everything?

Pittsburgh expects and laments that it will receive only a one-third Federal government reimbursement of the cost of snow removal incurred during the recent siege of winter weather.

One must ask. What is the purpose of municipal government? Keeping the streets open and usable for residents would certainly seem to be one of local government’s core functions, whether performed by City employees or contracted out to private service providers. But these days, it appears both the Feds and the local government have come to the belief that this function is partly the responsibility of the Federal government.

Not too surprising in view of the encroachment of the Federal government into every aspect of our existence. One would hope the Federal government would be as concerned about its core functions such as protecting and defending our borders from illegal immigration. But amazingly, that is now controversial. What is not shocking is that local officials are always willing to get in line for "free" money.

And that is the insidious part of the equation. When local and state officials begin to depend on Federal dollars to pay for increasing number of services and for reimbursement of unforeseen expenditures, it induces them to spend more than they otherwise would on items not yet subsidized. So a dangerous unintended consequence of Federal largesse is the diminution of fiscal responsibility in local governments. This, in turn, leads to more dependence and more loss of local responsibility. Not what the Founders envisioned nor a path designed to maintaining the liberty most Americans say they want and expect.