Republicans Want Cash-Strapped States To Declare Bankruptcy?

Speaking of the “Land of Lincoln,” I came across a piece in the Wall Street Journal yesterday in which Illinois Treasurer Dan Rutherford talked about the option of bankruptcy protection for cash-strapped states like Illinois. Michael Corkery wrote:

Illinois Treasurer Dan Rutherford has a solution to fiscal problems facing state and local governments.

“Someone has to go out and have the testosterone and deal with the problems, particularly with the public employee unions,” the state’s Republican treasurer said in a forum this week at Cardozo Law School of Yeshiva University in New York.

Testosterone, said Mr. Rutherford, is better than the alternative: allowing states to seek bankruptcy protection so a judge can sort out fiscal problem such as pensions.

According to Rutherford, Republicans in Congress are pushing the idea of bankruptcy protection for states. From the article:

While saying that, “I happen to be treasurer of one of the most bankrupt states in all of America,” Mr. Rutherford said he was breaking with congressional Republicans who have supported the state bankruptcy idea.

“I think what is driving this boat … that we have some Republican juice in D.C. and they don’t want to have … to bail this whole thing out.”

ABC News’ Mary K. Bruce reported back on February 27 that state governors are not big fans of the idea. She wrote in The Note blog:

Governors today slammed talk of federal action to allow states to declare bankruptcy and said the idea would ultimately do more harm than good.

“Suggestions have been brought forward and some speculation that states are teetering on the brink of bankruptcy. I’m here to say I believe that’s a dangerous development,” Utah Gov. Gary Herbert said at a panel on the state of public finance at the National Governors Association winter meeting. “It has risks to our municipal markets, to those who invest in our states wondering about the economic viability of our states. This is coming from incomplete and in many times inaccurate information.”

Herbert, who chairs the NGA’s Economic Development and Commerce Committee, went on to say that Congressional talk about a state bankruptcy option “brings uncertainty to the marketplace and causes a potential increase in interest rates. It rattles investors and will raise the cost of state government and create more volatility in the financial markets.”

Congress has held several hearings on the possibility of allowing states to declare bankruptcy, which, proponents argue, would help cash-strapped states get back on track by relieving them of debt. Influential Republicans, including Newt Gingrich and Jeb Bush, have suggested bankruptcy would give states the option to reorganize their finances and free themselves from union obligations.

“In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc,” Bush and Gingrich wrote in a Los Angeles Times op-ed last month. “The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.”

Governors at the NGA conference today strongly disagreed.

Stay tuned.

Sources:

Corkery, Michael. “Ill. Treasurer: ‘Testosterone’ Needed to Solve States’ Fiscal Woes.” Wall Street Journal. 24 Mar. 2011. (http://online.wsj.com/article/SB10001424052748703784004576220474201416538.html). 25 Mar. 2011.

Bruce, Mary K. “Governors Reject State Bankruptcy Option.” ABC News (The Note blog). 27 Feb. 2011. (http://blogs.abcnews.com/thenote/2011/02/governors-reject-state-bankruptcy-option.html). 25 Mar. 2011.

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