04 September 2011

State Bankruptcy

Just in time for Labor Day, David Skeel (noted here and here) has finally published a full-length article on the case for a new chapter of the Bankruptcy Code to permit individual American States to reorganize their financial affairs. Titled States of Bankruptcy, you can find its abstract here. Even though the relentless (and repetitive) American 24-hour news cycle no longer features the risk of State insolvency, we shouldn't mistake silence for success.

By narrowly-focused budget cuts (e.g., Wisconsin), substantial tax increases (e.g. Illinois), and better-than-expected increases in tax revenue (e.g., Virginia), American States dodged the bullet that hung over the heads of many of them earlier this year. However, the rapid slowdown of the anemic recovery from the Great Recession augurs ill for the continued success of such haphazard means; American States are out of Get Out of Jail Free cards.

And none of the list of one-shot items of short-term relief have addressed the dark nemesis that hangs over most of the States (and the federal government as well): unfunded pension liabilities. Combine one part of expectations for slow long-term economic growth with another of a greying American population plus a third of generous but unfunded pension promises and we have a recipe for deferred disaster.

Skeel argues that a voluntary regime of modification of enforceable obligations would spread the pain of Sate insolvency among all constituencies: taxpayers, current employees, retirees, and yes, even bondholders (creditors). Skeel also addresses, to my satisfaction anyway, six of the leading objections to creating a forum for State bankruptcy.

States of Bankruptcy is sufficiently long to put off all but those with a serious interest in the subject (policy wonks and academics). The rest of us should at least tuck it away for the day when the topic works its way back up through the news cycle.

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