PART I: CUTTING OFF THE NOSE

The length of this post reflects two things: the importance of this issue and the fact that you are unlikely to hear much about it until after the House passes the bill sometime next year. It will shock you to hear this, but congressional Republicans are quietly preparing a plan to radically alter the law – not to mention some of the foundational aspects of our federal system – to continue their war on anyone who makes more than minimum wage, score cheap political points against unions, and cram shock doctrine "austerity" and privatization schemes on state/local governments through Federal bankruptcy courts.

This Weekly Standard piece by professor (and supposed expert on bankruptcy law, although his argument calls those credentials into question) David Skeel has probably infuriated John Boehner and the gang by blowing the lid off of a plan to allow, i.e. force, states to declare municipal bankruptcy. Along the way he relies on standard Kristol-style hackery and a catastrophically bad analogy to suggest that such a scheme is not only constitutional but also in the interests of anyone other than the top 1% of the economic hierarchy, waiting like vultures to pick over the remains of public infrastructure.

PRELUDE
Any discussion of the fiscal crisis at the state level in the right-wing media must, seemingly by law, focus on Illinois and California. Skeel refrains from trotting out too many of the Liberal Straw Man cliches about those states, but they do form the entirety of his anecdotal evidence throughout the piece. This choice makes sense given the intended audience but no logical sense. According to the CBPP (whose figures are relied on heavily in this and any other discussion of state finances) California's projected 2012 deficit of a staggering $19.2 billion – 22.2% of the budget itself. No state has a larger deficit in absolute terms but many have larger deficits proportionally. God-fearing Texas, for example, has a $10b deficit that represents 22.3% of its budget – identical for all intents and purposes although slightly larger. So to be clear, Texas is actually more fiscally irresponsible than California. I certainly would not argue that either state is in good financial condition. However, there is no relevant difference between the two, yet only California gets singled out. Way to go, Prof. Skeel.

THE PLAN
Skeel argues in essence that municipal bankruptcy, which allows cities, counties, and other sub-state units of government to declare bankruptcy if insolvent (that will be important in a minute), should be extended to state governments. Currently it is not possible for a state to declare bankruptcy. The Bankruptcy Act of 1934, which was declared unconstitutional in 1936 but revised and passed again in 1937, grants only sub-state units of government to take advantage of Chapter 9. This has been done relatively rarely, but most famously in Orange County, California in 1994 when the cradle of suburban Reaganite conservatism refused to tax itself even a little in order to pay back the billions it lost in high-risk 1980s Wall Street escapades.

Bankruptcy can be beneficial for a county/city for the same reasons it can be beneficial for a company. It limits what creditors can do to collect. It allows the petitioner to escape from contractual obligations. But there are some key differences compared to individual or corporate bankruptcy. There are no "strong-arm" provisions wherein creditors can force a bankruptcy. Local governments must ask permission to file from their state and to prove that they are insolvent – i.e. that they cannot meet their obligations and have no alternatives. Chapter 9 bankruptcies are usually a way for governments to bring down costs by welching on pension obligations and firing people protected by civil service laws. I think you can see why this appeals to Boehner's Bunch.

THE MOTIVE
This is essentially an elaborate scheme to break it off in the collective ass of public sector unions. It creates a legal way for states to not only cut salaries and downside the workforce but also to walk away from contractual pension obligations. Furthermore, like a Chapter 11 bankruptcy can result in liquidation (a court-mandated sale of all assets with proceeds distributed proportionally to creditors) there is the possibility that courts could engage in limited liquidation-like activities with states – forcing them, for instance, to sell state parks and publicly-owned buildings like stadiums or libraries to private interests.

This is only the tip of the iceberg of bad ideas that could be rammed through in the name of austerity. Contracts could be invalidated and public services – from maintenance to seemingly essential functions like fire protection – could be awarded to the lowest bidder. Hey, why pay greedy cops when this two-bit mall cop outfit operating out of a storage shed behind the airport will do it for 10% the cost? Services could be curtailed (or substantial costs passed on to citizens) based on decisions made by creditors and bankruptcy judges. Doesn't twice-monthly garbage collection seem like enough? Be sure to put your $5 sticker on each bag!

So California would in some ways be quite different than General Motors in a bankruptcy proceeding, but at the same time there would be basic similarities. The goal of the debtor is to get legal blessing for reneging on its contractual obligations. The goal of the creditors is to get cents on the dollar. The goal of the court is to get all parties to come to an agreement and, failing that, impose a solution.

Everything sounds great to the average Teabagger thus far. Gunpoint privatization, punitive measures against fat cat union workers (e.g. your Aunt who makes $34,000 working at the county clerk's office for the last 25 years and gets 70% of that in retirement), and oppressive Federal power on behalf of the people who claim to love freedom the most. What could possibly go wrong? You will have to wait for Part II tomorrow. This is what is known as a cliffhanger.

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36 Responses to “PART I: CUTTING OFF THE NOSE”

  1. HoosierPoli Says:

    Not much of a cliffhanger, "breaking it off in the ass of public sector workers" sounds bad enough already. But I'm eagerly awaiting it.

    The question is, are there enough DINOs to roll over and let it through, like the shittastical bankruptcy reform bill that partially caused the massive private debt crash.

  2. Ben Says:

    This fits well with the measures Republican governors have been floating to deal with deficits. Eg Chris Christie talking about defaulting on the state pensions which haven't been paid into for six years.

    Also re: no media coverage: Reuters at least was on it a couple weeks ago. The reporter called it potentially "the biggest political battle in Washington in 2011".

    http://blogs.reuters.com/james-pethokoukis/2010/12/07/secret-gop-plan-push-states-to-declare-bankruptcy-and-smash-unions/

    And if it's possible it's worse than Ed describes. The tax compromise didn't extend a bonds program Obama created that currently accounts for 20% of new debt sold by states and local municipalities. Because it wasn't extended, it will be harder for states to meet their payment obligations. The program may be extended at a later point, but it's doubtful. It's worth noting that it was specifically not extended; Republicans bucked at including it. Almost as if a plan was in the works. Fuckin' tax compromise, just gets worse and worse as time goes on.

    My bet for the cliffhanger is the havoc wreaked in the bond market.

  3. Ben Says:

    Perhaps I should actually read what Ed linked to before posting. Ah well.

  4. Tim H. Says:

    I wonder how many more exciting economic opportunities for the financial sector the country can handle?

  5. Bette Noir Says:

    The real cliffhanger is how long it will take for our shit-for-brains capitalist overlords to pick over the moldering carcass of the American middle class to decide which toys they want and what can be trashed.

  6. Misterben Says:

    Somehow, it continues to astonish me that the Republican party, and many of the other power elites in this country, have forgotten entirely about their responsibilities to the rest of us. I don't know why I'm still surprised by it; it should be old hat by now. But over and over, they demonstrate how much they take their status for granted, as if it was given to them by Zeus himself.

    The idea of attacking public amenities or public utilities ought to be repugnant and horrifying to all Americans. Our public parks, utilities, libraries, etc. are an amazing achievement, only made possible because of our collective participation in a social contract. This is the same social contract that allows our elites to hold the positions they do. It amazes me that they would willingly attack the very thing that arranges for the masses to politely allow a minority to lord it over them.

    You can call it "civil society", you can call it a "social contract" – when it breaks down entirely is when a society fails, and when a society fails, the poor come after the rich in mobs.

  7. Denn Says:

    Our model for what's coming is the collapse and forced privatization of the Soviet Union 20 years ago. A merger between organized crime (i.e. the banksters) and government will make us an official banana republic (we're already in the de-facto stage of that anyway).

  8. bb in GA Says:

    No matter the substance of your detailed articles on this subject, I think your math is questionable or is it your confidence in BHO?

    First line of defense against the SunTan Man and the Republican Hell Hounds on BHO's Trail – are 41 Senate Democrat votes to filibuster. Your side gonna fail firewall 101?

    Second line of defense against your DINOs is our commie trained BHO. Do you think he would fail to Veto the combined SunTan Man and DINO bat guano?

    Third line of defense – surely we can come up with 34 Democrat true believer Senators to put down the mad dog veto override thang, No?

    Fourth line of defense – an army of Lefty cause advocatin' lawyers who would gum up the works with a vengeance.

    Again, I think you are in despair about Nov past. Buck up, better days are comin' for you commie bastards.

    Merry Christmas

    //bb

  9. John Says:

    @Misterben, "Somehow, it continues to astonish me that the Republican party, and many of the other power elites in this country, have forgotten entirely about their responsibilities to the rest of us."

    Oh, they haven't forgotten. They have willfully abandoned. Recall that many of the most ardent supporters of measures like this one, and similar ones such as the ol' "Audit the Fed" meme, are Rand-worshippers. They idolize a woman who quite openly held the belief that man is obligated to no one but himself. Much as Atlas's railroad and steel tycoons left society and went into a MAGICAL valley where all of the menial jobs that make society function somehow did themselves, so too do modern Rand fetishists hold the belief that the people that do things like handling their waste and repairing their roads aren't actually people, but magic pixies that somehow just do things without the need to feed their families.

    Their ultimate dream would be to privatize everything, completely disregarding the fact that, in order to function, society must perform some tasks that do not have a financial benefit.

  10. Del Says:

    Read this before leaving for the gym. Looked up from the elliptical trainer at the bank of TVs, and there was Fox News excoriating the public sector unions and the sweet deals they've all managed to arrange for themselves. The recurring graphic was the big red circle with a slash through it.

    The other screens were showing Rachel Ray entertaining a Kardashian and something about women with strange addictions. One of the subjects was eating toilet paper.

  11. mojidoji Says:

    I find the parallels between the Tea Party movement and the Soviet Union under the Taylor system to be striking. Already, a common thread, via Glenn Beck, is how the elites can not or will not understand the problems of the common American and, as such, are unfit to govern. On the other hand, we find a sort of corporate fetishism via free market fundamentalism in which the common man's purpose is to serve corporate interest. Selling off government interests is rational only in a world without secondary effects, which have been defined out of the equation via the market fundamentalism. The capitalist defines what is positive, rather than the common man, whose interest has been sold off to serve his corporate master – the new government. But, now, who will correct market failure? And we are full circle to monopolistic capitalism.

    I guess this is to be expected in a country where political thought can be represented two-dimensionally.

    Despair not, bb. Communism isn't so different from your fascism.

  12. Kulkuri Says:

    @mojidoji, your last line is priceless!!

  13. bb in GA Says:

    And I thought mine was…

    //bb

  14. jj Says:

    Sounds like a page from the IMF playbook.

  15. JMLA Says:

    Ugh you ruined my festivus with this post.

  16. Hazy Davy Says:

    1) "God-fearing Texas, for example, has a $10b deficit that represents 22.3% of its budget – identical for all intents and purposes although slightly larger" is slightly misleading. I mean, the deficit to budget ratio could vary, based on the debt/surplus situation at the beginning of the period, couldn't it? [Bummer, too...I'm in favor of Texas criticism, and California enthusiasm.]

    2) So, without the good professor's plan, what happens, and at what time, to California? Instead of failing to meet its contractual obligations, it borrows money (a "bailout"?) from the Federal government. At what point does the Federal government say "nevermind, no more for you, booting you from the republic"? Or do they never do this, in which case there's little incentive for any state to balance their budget, ever. Seriously, without state bankruptcy, what happens, and when?

    3) When Joe Sixpack files for creditor protection bankruptcy, he carries burdens after the fact…he agrees to pay pennies on the dollar, and the contracts are renegotiated, but it comes at a cost. It's on his credit report, and he's not going to get another loan anytime soon, and it will affect his ability to get certain jobs, or to rent certain properties. It's no cakewalk. When ACME Rocket, Inc. files for Chapter 11 protection, they agree to pay pennies on the dollar, and the contracts are renegotiated, but it comes at a cost. Their paper ratings go down, and they have to pay a higher premium to acquire debt. Given their instability, they may have to pay more for the same human resources. They may not be able to lease certain real estate. It's no cakewalk, and it enables both ACME and their creditors the ability to get something, instead of nothing. (Chapter 7 enables the creditors to get something and ACME to dissolve.)

    So, if California were to go bankrupt, their creditors would get something (rather than nothing—wait, is "nothing" even a possibility? And who are their creditors? And is the Federal government obligated to be the lender of last resort?) They'd get to start over with new contracts (yeah, that "breaks it off in the …."). But what is their disincentive to bankruptcy, their "not a cakewalk" provision, their discouragement from doing it whenever they want to renegotiate/renege on their contracts?

    Ultimately, I see why state bankruptcy makes little sense. What I *don't* see is what happens without it, or how that's better…

  17. BK Says:

    Not sure Boehner's plan is completely necessary in order for new Governor's to impose their plan to break da unions.

    The new Governor of Wisconsin has already publicly stated that he would be willing to consider decertifying the state unions if they didn't support further concessions including paying a higher share of their health insurance. This is the same guy, who as Milwaukee County Executive substantially shrunk the size of the county employee workforce through privitization, imposed furloughs and not filling vacant positions.

    The problem for the unions is that they've got no friends left either in the general public or within state legislatures.

    So if you don't have to declare bankruptcy because you were able to break it off in the arse of the public unions by just breaking them, a new GOP governor could look like a hero by saving money and not welching on debt to the creditors that bankroll bonded pork projects.

  18. Major Kong Says:

    There's a saying going around Russia these days that's something like:

    "Everything the Communists told us about Communism turned out to be utterly false. Unfortunately, everything they told us about Capitalism turned out to be true."

  19. Ben Says:

    @bb

    How do you contend with the fact of the bond extension being dropped in the tax cut compromise? Did the GOP gain some senators? With 1/5 of the states' ability to pay gone, what can pick up that kind of slack?

    Obama and other Democrats face incentives besides keeping libraries, parks and fire departments under public control. Couple that with the impending crisis in states' deficits (which, again, will be caused in some measure by a bill that was passed without Republican gains in the House and Senate) and bankruptcy starts looking not only possible, but probable.

  20. mojidoji Says:

    Actually, I'm for breaking the government employee contracts/unions. Having watched my highly educated parents suffer through the last decade of their careers with the government has soured me to the idea that we deserve to have such people filling those positions. They could have made far more in the private sector, which if the public isn't willing to pay them, is where they belonged.

    Sure, it's a knee-jerk reaction to falling tax revenue, increased spending, and tax aversion, but what alternative have we, given our system of government? While it may be morally correct or noble to fight for the alternative, there will be a time when the boundaries have been over-stepped. If they are correct, we win; if they are not, they might learn a lesson, but a complete lack of faith in our system seems far more damaging.

    I've not yet seen any solution to the fundamental issue, so I see few alternatives to "shutting it down". Hopefully smarter folks have better ideas.

  21. zebbidie Says:

    I've not yet seen any solution to the fundamental issue, so I see few alternatives to "shutting it down". Hopefully smarter folks have better ideas.

    Hi mojidoji
    The Russian public service was horrible in a way that you can't imagine. The Gorbachev 'reforms' destroyed it. Russian descended into virtually a gangster state with all the assets of the people being transferred by their corrupt governers to ex-party functionaries who made billions upon billions. This because there was no public service to even try to make sure laws were followed.

    Now they have now nearly dropped back into a single party state with a dictator (though the people ARE allowed to buy Beatles records). So the reply to your statement is that you are very far from the worst possible PS and you fail to appreciate just how much your very stable, law-abiding and safe society depends on it.

    Do not believe what the right-wing noise machine tells you. Quite literally, if one of their outlets tells you something that is not on the lines of "the sun rose in the East today", assume they are lying until you get independent verification. They are lying about what the PS does, how efficient it is and just how good a job it does.

  22. bb in GA Says:

    @Ben

    I have no knowledge of bonds, but I understand order of magnitude (OOM) in data.

    The BABs (Build America Bonds) were zapped in the compromise.

    "The BABs program, which enabled borrowers normally confined to the muni market to tap a broader universe of big investors, has helped insulate muni bonds from the effects of generally poor state and local government finances.

    BABs issuance in 2010 has been $110 billion, almost all of it long-term debt maturing in 20 years or more, according to Guy Lebas, chief fixed income strategist at Janney Montgomery Scott."

    I don't understand how increasing debt service on an OOM $100 billion over 20 years spread out over all 57 states is going to be the hole in the boat that sends her to the bottom.

    Can you educate me further? Or is am I just too simple to git it?

    //bb

  23. mojidoji Says:

    zebbidie,

    Then let's hope that some sanity is brought to the debate.

  24. xynzee Says:

    @bb: 57 states?
    While TB – talk about a DINO – fell very nicely into line and Canukia, Spain, the Cloggies, and don't even get me started on Bonsai (Howard) and a few others joined the Coalition of the Willing. Last time I checked they (we) still hadn't joined the Union . Apart from 1 Federal District, and some protectorates/territories I still only count 48 contiguous and 2 outlying States in the Union. So these 7 extra imaginary states come from…?

    Personally, the more I think about this thing, the more I'm warming to it. Sounds like the best thing since sliced bread in a political sense.

    Sure there will be a lot of people hurt in the fall out, probably the top 1% will be like the proverbial drunk driver who kills, maims and injures others and walk away without a scratch. However, imagine all those F-wits who are standing knee deep in their own faeces having bought this ideological BS so blindly.
    Hopefully, – and this is the important part – this will cause civil unrest on such a magnitude that all other observing countries will watch in horror as it unfolds. Thus causing anyone who listens to Rand ideology in other countries to quickly realise just how stupid this ideology is and shut their pie-holes, or get beaten to death.

    Granted it's easy to say this as a voting ex-pat. from a safe distance, however there are lots of these roof-tiling ideologues spouting this crap over here too.

  25. Matt Says:

    @xynzee: Civil unrest is certainly a possibility, but there's a good chance it will be directed *against* the state, not against the 1% responsible for this mess. They've spent more than three decades convincing a huge chunk of the American populace that government is the problem and the 1% (plus Jeebus) have all the answers.

  26. bb in GA Says:

    @xynzee

    I was being too cute by about 1/3 to 1/2.

    The 57 states should have been in quotes, I suppose, since I was taking a jab at our President who made that errant reference during the campaign in 2008. Since you don't listen to Faux news, you probably never heard about it.

    I agree that any unrest would be directed at government, not towards those that y'all think are the puppet masters.

    //bb

  27. Ben Says:

    @bb

    I got the reference, much appreciated.

    States and municipalities sell bonds every year. The buyer of the bond pays cash up front. The bond is an agreement to pay back the investor with interest over a period of time.

    http://en.wikipedia.org/wiki/Municipal_bond

    States and municipalities sell bonds because they need cash in the short term. I don't know what you're quoting in your earlier comment since you don't provide a link, but from what you posted the $110 billion figure refers to the amount of bonds issued in a single year. This is the amount of cash that states received in 2010 from selling bonds. Your quote goes on to say that that money (plus interest) has to be paid back in 20 years.

    So what you quoted is saying that, if BABs had been restricted in 2010, the states would have had an additional $110 billion shortfall in their collective budget.

    Now obviously this is spread out over the 57 states or whatever, but that is still a lot of money to try and come up with. Ed's first link indicates that this is about 1/5 of the debt issued by states to pay for their budgets, and that the projected shortfall for all the states is $140 billion in 2011.

    Here's a CNN story that makes much the same point: http://money.cnn.com/2010/12/22/news/economy/build_america_bonds/

    As another example, California issued $14 billion worth of BABs last year, and this year's projected budget shortfall is expected to be $19 billion.

    To sum up: states sell bonds through the BAB program. This gives them cash. They repay the bonds over a period of time. Take away the BAB program, take away the cash that the states get when selling the bonds. The amount of money issued through the BAB program is not small. Excluding this program will help drive the states toward a budget crisis. And Republicans specifically excluded it from the tax cut compromise.

  28. Da Moose Says:

    Good. And I'll write part III detailing the solution. (Took me all day to come up with that comeback. :))

  29. Xynzee Says:

    Ah! That makes more sense. But I was seriously hoping to stick it to ya as far as R's being unable to count ;)

  30. Fifth Dentist Says:

    I'm not surprised that Texas has a budget whole, what with all the electricity they use in the electric chair.*

    * I know, I know, they use lethal injection in Texas. But "electric chair" sounds better and is more succinct than "acquisition of a toxic brew of chemicals and needles used in the killing of human beings, who in many cases turn out to have been innocent or at least represented by defense attorneys who slept through much of the trial."

  31. Denn Says:

    It looks like the Senate may tweak its fillibuster rules, given the recent excesses. Just in time to enable a smaller contingent of blue dogs to rubber-stamp all manner of fuckery coming from the orange one's House. We've heard "We don't have the votes" time and again as an excuse for failure to bring up progressive bills; it may become the excuse for failure to block wingnuttery.

  32. bb in GA Says:

    @Ben

    Thanks for the detailed explanation.

    @FifthDentist

    In 2007 there were 42 executions in the USA. 20 something ststes don't have the death penalty. Texas executed 26 (from memory) and the other 20 something states executed the other 16 amongst 'em.

    As Ron "Tater Salad" White says "If you kill somebody in Texas, we'll kill you back!"

    //bb

  33. Arslan Amirkhanov Says:

    The Russia analogy is quite apt, though some people could stand to brush up on their history a bit. What happened in Russia was basically a libertarian wet-dream come true. Because there was virtually no law regulating private property(though de facto private property existed as far back as the 60's and was legalized in 1987), people with connections could basically run amok. Of course libertarians will try to claim that Russia had massive regulations which barred entry into the market and thus hurt competition. This is bullshit however, because while the laws on paper were complicated- they were basically unenforced(along with tax collections), and anything could be solved with a wad of bills.

    Russia is the ultimate proof of the failure of trickle-down economics. If super-rich people are able to pay virtually no taxes as they become incredibly wealthy, trickle-downers would have us believe that they will reward their workers with plush jobs, fat paychecks, and big bonuses. Of course nothing like this happened. Assets were stripped, and money was moved out of the country, including money from IMF loans.

    As for who these oligarchs are, they weren't all necessarily former factor members or party officials; a great deal of them came from segments of society traditionally excluded from Soviet society(though they performed a useful function in the idiotic days of Khruschev and Brezhnev). The manner by which former Communist managers and officials obtained their wealth relates to the voucher program. Basically they fought so that managers and employees would have priority in the issuance of vouchers. In theory this seemed like a positive thing, as it would allow the workers in a particular enterprise the opportunity to benefit from ownership of their factory via vouchers. In reality, managers used a number of threats and tricks to buy up the vouchers of employees(if they even paid at all), and then stripped the assets and shipped the wealth out of the country.

    It is ironic that Russian nationalists have for some time been predicting the fall and break up of America. They have the unrealistic assumption that the US can break apart just like the USSR(forgetting that according to the USSR's constitution, the SSR's were sovereign republics, which is precisely how they seceded in the first place without too much Yugoslavia-style trouble). As unrealistic as these butthurt predictions are, America is certainly headed down the road to a significantly lower standard of living at a high speed. The Tea Party morons have absolutely no idea that the ideal society they want, where rich people pay virtually no taxes, and government regulation is practically non-existent, is in fact Russia in the 1990s.