Posted in Rants on December 24th, 2010 by Ed

(Please start with Part I: Cutting off the Nose from Wednesday)

Having laid out the rationale for state-level municipal bankruptcy, it is clear that as with any bankruptcy there are some pluses and minuses involved. In the case of legitimate insolvency, one might even argue that this would be the best possible resolution. For a number of reasons, the generic "one" does not include me.

The flaws inherent in this proposal are numerous. I will focus on three: constitutionality, necessity, and political buck-passing.

1. Professor Skeel may know quite a bit about the bankruptcy code – I lack the knowledge necessary to dispute that, so let's assume he does – but he appears to be badly misinformed about the basics of federalism and how local and state governments differ. Simply put, the analogy between state and municipal governments is so inappropriate that I have to question the intellectual honesty behind the decision to use it.

City, county, and other municipal governments can file bankruptcy under Chapter 9. Skeel and the GOP feel like this means states can do the same. But local governments are corporations – municipal corporations, specifically – chartered by state governments. From the perspective of the bankruptcy code, General Motors and Detroit, Michigan are remarkably similar (although with obvious key differences). A local government can go tits-up (financially) because local governments have no inherent power except that which is granted to them by their state.

That is not true of states. Not even a little. State governments do have inherent powers independent of the national government – I thought conservatives were big on this idea? I guess "states' rights" is only a relevant argument when black people are asking to vote. Anyway, our federal system is based entirely on the idea that state governments relinquish certain powers to the Federal government for the common defense and welfare. That it is constitutional for the Federal government to administer the bankruptcy of one of its own building blocks is not at all clear. And remember we're talking about one or a few states. Not every state. For the Federal courts to administer a debt reorganization plan to one but not all states would be a federal version of what is called "Special Legislation" at the state level.

The debts of individual states at the founding were assumed by the Federal government (under the Residence Act of 1790) because Congress recognized that being a Republic it was directly contrary to the national interest for any individual state to collapse financially. You'd think people who quote the founders so often would be familiar with this argument. Many of the basic criticisms of bankruptcy also apply here, particularly the moral hazard (states could spend like drunken sailors and then simply file bankruptcy when the money runs out) and the petitioner would no longer be able to secure credit from the financial system (which in practice would probably result in Congress providing billions upon billions of dollars in Debtor in Possession financing).

2. In what world is bankruptcy the only or best option here? States, no matter their financial distress, do not lose the ability to raise revenue. While the previous post's comment thread has already touched on BABs (which, of course, Republicans want to chop as well because doing so will help force states into bankruptcy) there is an even more basic option: grow some fucking political balls and raise taxes. One need not believe that raising taxes is either good or desirable, but if this situation is so dire and such a crisis that we're talking about state governments becoming insolvent and filing for bankruptcy it would seem that every option should be on the table. Time for some of those "tough choices" they're always telling us about when they're cutting spending.

There's nothing "necessary" about what is being proposed here. It is simply a scheme to:
A) Legalize state-level bankruptcy
B) Restrict states' ability to raise revenue through bond sales
C) Cut off the flow of Federal funds (the GOP presuming it can continue to control Congress)
D) Force states into bankruptcy court where the judges will let them void their pension plans

Which brings us to the final point.

3) What is filing bankruptcy from the state perspective other than political cover? It's merely a way for gutless state politicians to say "The bankruptcy court made us sell all the state parks" or "Those bastards in Washington cut your pensions, not us." Again, if all of these steps are so gosh-darn necessary then get in front of the camera and tell the state's voters "This is what we need to do." Attempting to resolve problems with budgets, a fundamental political issue, through the legal system and the Federal one at that is nothing worse than a severe case of political cowardice.

Understanding that a lot of bad things could happen in a bankruptcy process that we'd be making up on the fly – courts could liquidate a state's public assets or, if the law was not sufficiently narrow, force a state government to institute revenue increases or spending cuts – what member of Congress in his or her right mind would support this? Why, Darrell Issa and Devin Nunes from California sure would! You have to admire the amount of political courage, or perhaps just blind hatred and ideological fervor, required for Congressmen to pitch a plan that will end up demonstrably screwing their own constituents just so the GOP can score points against public sector unions. I mean, that's amazing. What balls! Republicans in Congress are actually willing to enact a plan to drive their own states into bankruptcy, force austerity on state governments, and severely undercut the state and local services on which their own constituents depend…just to say "Hey, fuck you, unions!"

Of course the obvious obstacle to enacting any of these changes is the White House. Why would the President sign such a bill? If that seems implausible I would suggest you pay more attention to what goes on at 1600 Pennsylvania Ave. these days. Why wouldn't BO love to sign something that Mitch McConnell insists is a great idea? How bipartisany! How fiscally responsible! Won't voters love it if he bucks his own party? Hell, maybe his own party will support it in Congress as well. Perhaps they'll trade it for a $3 billion package of unemployment benefit extensions. Or maybe there will be a different president soon and the GOP won't perceive him or her as an obstacle but as an ally. As for how the Supreme Court could possibly find such a scheme constitutional, I almost hope this all happens just so we can marvel at the intellectual contortions necessary for noted State Power advocates Scalia, Alito, Roberts, and Thomas to explain why they think a Federal bankruptcy court should start giving orders to the State Capitol and governor's mansion.

Sorry to be such a downer at Christmas time, but this issue is less of a "what if" and more of a matter of time as Stimulus money runs out and state governments confront budget crises even more severe in 2011 and 2012 than what we've already seen in 2009 and 2010. Buckle up, it's gonna be…actually, don't bother. Buckling up helps in a fender-bender but when you ram your car into a concrete wall at 110 mph, frankly it doesn't matter.