The New York Times, January 20th, 2010

Policy makers are working behind the scenes to come up with a way to let
states declare bankruptcy and get out from under crushing debts,
including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal
bankruptcy court. Any effort to change that status would have to clear
high constitutional hurdles because the states are considered sovereign.

But proponents say some states are so burdened that the only feasible
way out may be bankruptcy, giving Illinois, for example, the opportunity
to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural
problems, like insolvent pension funds, that are diverting money from
essential public services like education and health care. Some members
of Congress fear that it is just a matter of time before a state seeks a
bailout, say bankruptcy lawyers who have been consulted by
Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to
retirees, which are often protected by state constitutions, and it could
provide an alternative to a no-strings bailout. Along with retirees,
however, investors in a state’s bonds could suffer, possibly ending up
at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a
partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond
market with the words “state bankruptcy” has proponents in Congress
going about their work on tiptoe. No draft bill is in circulation yet,
and no member of Congress has come forward as a sponsor, although
Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

House Republicans, and Senators from both parties, have taken an
interest in the issue, with nudging from bankruptcy lawyers and a former
House speaker, Newt Gingrich,
who could be a Republican presidential candidate. It would be difficult
to get a bill through Congress, not only because of the constitutional
questions and the complexities of bankruptcy law, but also because of
fears that even talk of such a law could make the states’ problems
worse.

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The Wall Street Journal, August 27th, 2010

Recently some critics have accused me of bullying
state employees. Headlines in California papers this month have been
screaming “Gov assails state workers” and “Schwarzenegger threatens
state workers.”

I’m doing no such thing. State employees are
hard-working and valuable contributors to our society. But here’s the
plain truth: California simply cannot solve its budgetary problems
without addressing government-employee compensation and benefits.

As former Speaker of the State Assembly and San Francisco Mayor
Willie Brown pointed out earlier this year in the San Francisco
Chronicle, roughly 80 cents of every government dollar in California
goes to employee compensation and benefits. Those costs have been rising
fast. Spending on California’s state employees over the past decade
rose at nearly three times the rate our revenues grew, crowding out
programs of great importance to our citizens. Neglected priorities
include higher education, environmental protection, parks and
recreation, and more.

Much bigger
increases in employee costs are on the horizon. Thanks to huge unfunded
pension and retirement health-care promises granted by past governments,
and also to deceptive pension-fund accounting that understated
liabilities and overstated future investment returns, California is now
saddled with $550 billion of retirement debt.

The
cost of servicing that debt has grown at a rate of more than 15%
annually over the last decade. This year, retirement benefits—more than
$6 billion—will exceed what the state is spending on higher education.
Next year, retirement costs will rise another 15%. In fact, they are
destined to grow so much faster than state revenues that they threaten
to suck up the money for every other program in the state budget. (See
the nearby chart.)

I’ve held a
stricter line on government employment and salary increases than any
governor in the modern era (overall year-to-year spending has increased
just 1.4% on my watch). Nevertheless, employee costs will keep marching
upwards because of pension promises, and they will never stop doing so
until we get reform.

At the same
time that government-employee costs have been climbing, the
private-sector workers whose taxes pay for them have been hurting. Since
2007, one million private jobs have been lost in California. Median
incomes of workers in the state’s private sector have stagnated for more
than a decade. To make matters worse, the retirement accounts of those
workers in California have declined. The average 401(k) is down
nationally nearly 20% since 2007. Meanwhile, the defined benefit
retirement plans of government employees—for which private-sector
workers are on the hook—have risen in value.

Few
Californians in the private sector have $1 million in savings, but
that’s effectively the retirement account they guarantee to public
employees who opt to retire at age 55 and are entitled to a monthly,
inflation-protected check of $3,000 for the rest of their lives.

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