Politics

"Secret GOP Plan: Push States to Declare Bankruptcy & Smash Unions"

| by Reason Foundation

By Matt Walsh

So runs the headline on a very interesting Reuters column from James Pethokoukis yesterday. Here's how it begins:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That's why the most intriguing aspect of President Barack Obama's tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program.  BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31.  And my Reuters colleagues report that a GOP congressional aide said Republicans "have a very firm line on BABS — we are not going to allow them to be included."

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In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states' unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds.

Some related Reason headlines:
* "Failed States: After a long spending binge, governors go begging for a handout. It won't be their last," May 2009
* "The Next Catastrophe: Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode," February 2009
* "The Municipal Debt Bubble: As cities and states boost their debts by 800 percent, a housing-like crisis looms," January 2011.