State Bankruptcy: A Right Wing Fantasy to Enable Confiscation of Employee Pensions

States currently cannot declare bankruptcy.  If the right has its way, that would change, according to an article, (“A Path is Sought for States to Escape Their Debt Burdens,”)  by Mary Williams Walsh in the January 20, 2011 New York Times.

Walsh cites such right-wing politicians as Newt Gingrich and conservative media as The Weekly Standard who are backing legislation that would allow states to declare bankruptcy.  Such a legal declaration would then allow judges to reduce or eliminate pensions. 

Most of the Times article is devoted to the advantages of that course of action and the obstacles that it faces as legislation. It is built though on a false premise—that “some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care.” 

The author of the article has confused  the existence of unfunded liabilities with insolvency.  The former, as explained in an earlier posting (see “Unfunded Public Employee Pension Liabilities:  a Red Herring”) means that a pension funds does not have sufficient reserves to immediately pay off all obligations to retired and current workers should contributions completely stop—a condition that only bankruptcy could allow.  Insolvency means that a fund does not have enough income to pay its bills.  A number—but not all—state pension funds have unfunded liabilities; but none are insolvent or near there.  All state pensions have sufficient funds to pay obligations to retirees.

The right wing wants the possibility of state bankruptcy in order to confiscate the current state pension trust funds and divert them to other uses—such as to pay off state bondholders or balance budgets.  That would of course be an expropriation of state workers’ retirement savings.

It would be as if  Congress voted to seize the Social Security Trust Fund to balance the budget of the general fund.

The right’s long term goal is to eliminate all defined benefit pensions, which state bankruptcy legislation would facilitate, and force people to rely only on private stock market investment accounts such as 401(k)s.

Fortunately, there is not much likelihood of the state bankruptcy campaign succeeding in at least the near future.  State bankruptcy, aside from being threatening to pension participants, would also threaten the interest of bondholders and stability of financial markets.  State tax revenues are already increasing, however slowly, as the economy recovers. As they increase, the crisis atmosphere around state financing will decrease, and with it any temptation by politicians to entertain right-wing radical proposals such as allowing states to declare bankruptcy. There is also the reality that guaranteed contractual claims to pensions represent legally binding property rights; and if there is anything that this country seems to honor, it is property rights.

James W. Russell

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