Senate Majority Leader Mitch McConnell’s proposal to consider bankruptcy proceedings for states would encounter acute constitutional difficulties. Moreover, experience with municipal bankruptcies counsels against the proposal.
Those proceedings might solve temporary liquidity problems for small government entities. But Illinois is not small, and its problem is not a mere lack of liquidity: It is a failed enterprise facing insolvency.
In corporate bankruptcy, such enterprises are restructured or dissolved. We cannot do that to states.
Sen. McConnell’s suggestion nonetheless sends a much-needed message: We must not accede to the demands of the states, their pension funds and their investors for yet another $500 billion or $700 billion in debt relief.
Even fiscally sound, responsible states cannot be expected to cope with a calamity of the present magnitude. But now that Congress and the federal government have supplied substantial emergency funds, they must hold firm against thinly veiled bailout demands.
OUR VIEW:Bail out states, but not irresponsible pension funds
We did not bail out states or their creditors even after the Civil War or in the Great Depression, when several of them in fact defaulted and suspended their debt payments.
That painful but salutary anti-bailout commitment distinguishes our federalism from the ruinous fiscal arrangements of Argentina or Brazil, where provinces have routinely gambled on emergency relief, obtained it and then promptly resumed their spendthrift ways. Debt relief, once granted, will only postpone the inevitable reckoning and, worse, encourage irresponsible behavior.
That objection also applies to proposals — floated in the wake of the 2008-09 financial crisis and again now — to condition federal relief on states’ agreement to fix their pension systems. Those promises will be empty. Or else, they will have to be enforced by taking the state into federal receivership, both to cram down the necessary reforms and to deter the next deadbeat state and its hangers-on.
We are doing that to Puerto Rico, with mixed results. We cannot do it to states with a constitutionally guaranteed “republican form of government.”
Debts that cannot be paid will not be paid. COVID-19 merely confirms that oldest law of public finance.
Michael Greve is a law professor at George Mason University.
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