As Congress reconvenes next week to pass a $26 billion bailout of state and local governments entombed in their own deficits, we witness a foretaste of the crisis that will be the central event of the first half of next year: the collapse of state governments.
As long as the Democrats control Congress, they will continue to rubber-stamp Obama’s requests for bailouts of profligate states. But when the Republicans take control, they will be less than forthcoming. Republicans will ask the central question: Why should taxpayers from states that have cut their budgets and observed spending restraint, pay for the extravagances of the other states? Why should forty-seven states have to pay for California, New York, and Michigan?
State government employment has risen by 16 percent since 1995 and overly generous Medicaid and other spending has climbed alongside it. Pension obligations, initially incurred as a cheap alternative to pay raises for public workers, are increasingly driving state budgets over the brink.
State and local governments and school boards are hostages to the public employee labor unions that control their finances through their contracts and their politics with their donations and votes. These nominally democratic government bodies are as much under the sway of their union captors as the auto companies are of the UAW.
When a Republican Congress turns off the spigot of federal bailouts, the municipal and state bond markets are going to take the hint and stop buying state paper at any interest rate. California will find its debt has become unmarketable and will come begging Congress for relief. First it will seek federal money and then its demands will escalate into a federal guarantee of its state debt.
The Greek financial crisis will come to our shores in the form of state bankruptcies.
Hopefully, Republicans will not be so weak-kneed as they are in the face of the current shortfall and next week’s demand for aid. With two Senators caving in, the Democrats were able to pass their aid bill and send it to the House next week.
The Republican solution to state financial distress should be simple: The Party should insist on a change in the federal bankruptcy law providing for a procedure for state bankruptcy (none now exists). This process must call for abrogation of all state and local public employee union contracts as is usually done in private sector bankruptcies. By freeing states and local governments (including school boards) of their union obligations on wages, work rules, staffing, and pensions, they have a chance to survive and, indeed, to prosper. But merely subsidizing these massive expenditures just prolongs the misery of the states in question.
The collapse of overspending state governments must trigger the diminution of the power unions hold over their budgets and their politics. Their coming bankruptcies offer an opportunity for reform and the Republican Congress – backed by newly elected Republican state governments – give us precisely the opportunity we need to effectuate it.