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.
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.
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.
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.