The primary motivation of the “state bankruptcy” crowd is the collapse of state government finances.
Despite the fact that state governments don’t need “bankruptcy” to solve their financial woes — spending cuts and tax hikes will do — a claque of mostly-conservative politicians are eager to push states further towards collapse, and hopefully undo agreements made with pensioners and state unions — two very unpopular groups.
She quickly identifies what Newt & Co. ignore
Take New York, with its $78.4 billion in outstanding bond debt and estimated $81 billion in unfunded obligations for state-employee pensions and retiree health care. The idea seems to be that the Empire State would go “bankrupt,” figure that it can afford only, say, 80 per cent of this number — and get a judge to lop off 20 per cent.
Ha. The complications of the municipal-bond markets make this plan hopelessly naive.
For starters, states like New York run up “their” debt indirectly. They issue bonds through tens of thousands of separate legal entities. New York “state” doesn’t owe all of that $78.4 billion in debt — it owes only $3.5 billion in “general-obligation” debt.
Who owes the rest? The MTA, the Dormitory Authority, the Triborough Bridge & Tunnel Authority and so on. Legally, each is not a government but a “public-benefit corporation.” Each has its own board, its own rules and its own contractual agreements with creditors, from bondholders to unions. Each of those agreements offers creditors different protections.
In other words, the idea that things could just be solved if New York State declared bankruptcy is naive. What happens to the MTA or the other authorities she lists? Do they automatically become bankrupt, as well? And why, presuming they can cover their nuts, stop paying what they owe.
Another problem Gelinas identifies: In New York, for example, certain obligations are mandated by the state constitution, and no Federal bill establishing a state bankruptcy could supercede the state constitution. So much for states’ rights, eh?
Bottom line: Not only would it be impossible for state bankruptcies to be clean, they’d inject a massive amount of uncertainty into the existing muni bod market. In fact, an analyst from S&P was on CNBC this morning, saying exactly this, that the current obligation of states to pay their debts is part of the reason many remain a high rating. If the law changed, the appeal of muni bonds would diminish (obviously).
Best to let the states get out of their mess by law changes, tax hikes, and spending cuts, then to introduce this dynamic into the market.