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State Bankruptcy

posted by Stephen Lubben

So Senate Majority Leader Mitch McConnell says States should be able to file for bankruptcy, to get out of their pension obligations. He'd rather that than give them a federal bailout, given current conditions.

I have long argued that States don't need bankruptcy, because they have stronger sovereign immunity (under the Eleventh Amendment) than most actual sovereigns. But put that to one side.

Why does McConnell think that such a bankruptcy will be limited to single class of creditors? Indeed, I doubt such a bankruptcy system would be consistent with the Bankruptcy Clause.

And quite frankly, I suspect bondholders understand this (even if anti-union activists don't). That is why you never see the municipal bond managers advocating for "State bankruptcy." The bankruptcy of any of the 50 states would look more like Puerto Rico's, where haircuts to bondholders are most definitely on the table. The only question is "how much?"

Comments

Agree across the board. My sense is that a state bankruptcy law would have primarily rhetorical rather than economic significance. https://twitter.com/vsjbuccola/status/1253054595493961730

States that have fully funded their pensions (there are some, at least there were at pre-pandemic market levels) are not in any better shape than others in terms of being able to meet their current non-pension obligations, and provide pandemic relief, in the face of collapsing current revenue streams. In effect, McConnell wants to authorize states to cut benefits in order to raid pension funds to pay current obligations -- thus, using retirees as involuntary plan funders, and ironically penalizing pension managers, state legislatures and voters who have been most fiscally responsible.

Professor Skeel, in an article written well within the shadow cast by the last recession, opines that the anti-pension-modification provisions of some state constitutions do no more than give retirees a secured claim that is only worth as much as the assets backing it. That is an untested hypothesis. I'm not so sure. The ability of a federal statute to override a state constitution, as to a state-created obligation of a state governmental entity, presents obvious federalism issues. Could state-constitutionally-protected pensions be more like a type of nondischargeable debt?

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