Allowing bankruptcy for states would bail out irresponsible pols 

Should California declare bankruptcy?

In virtually every discussion of the state’s fiscal crisis, the B-word pops up sooner or later — even though federal law does not allow states to wipe out their debts through bankruptcy.

Cities, counties and other units of local government can declare bankruptcy — the city of Vallejo being California’s most recent example. But the state cannot, unless, as some Republican politicians are suggesting, federal law changes.

Former House Speaker Newt Gingrich, a potential 2012 Republican candidate for president, is the most outspoken advocate of allowing states to declare bankruptcy, and some GOP congressmen are reportedly drafting such legislation.

Why? Officially, they portray it as an alternative to a federal bailout of California and other distressed states. But it is clear they see bankruptcy as a way of undercutting public employee unions by allowing states to abrogate union contracts and perhaps vested pension rights.

On Monday, those unions struck back through the Washington, D.C.-based Economic Policy Institute, a left-of-center think tank closely aligned with organized labor.

California Treasurer Bill Lockyer participated in a national telephone news conference with EPI officials, to denounce the bankruptcy concept.

“No state needs to declare bankruptcy,” Lockyer said. “The states have sovereign taxing power the big companies don’t.”

Lockyer’s point — a valid one — is that bankruptcy is the refuge for individuals, corporations and local governments that lack the capacity to repay their debts. California and other states have, at least on paper, an unlimited power to levy whatever taxes they may need to cover their obligations.

California is a case in point. Its budget deficit is roughly $20 billion a year, which is a lot of money,  but scarcely 1 percent of the state’s economic output.

Its chronic inability to close the deficit is not, in other words, an economic matter but a political one. Therefore, it is not bankrupt in any rational sense of the word.

Allowing states to declare bankruptcy would let politicians off the hook for their irresponsibility, but also create disruption in the municipal bond market. Just the rumor of bankruptcy legislation has already affected that market because it raises the specter of debt repudiation.

Republicans who posture as advocates of fiscal responsibility should be ashamed for even suggesting such a destructive move. It is, as Lockyer said, merely “political opportunism.”

Dan Walters’ Sacramento Bee columns on state politics are syndicated by the Scripps Howard News Service.

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Dan Walters

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