States Should Not Receive Bankruptcy Protection.

There are a couple of good reasons for this.

Mitch McConnell believes he has hit upon a solution for states that are upside-down on their pension obligations and other financial commitments: “I would certainly be in favor of allowing states to use the bankruptcy route,” he told Hugh Hewitt on Wednesday. “It’s saved some cities, and there’s no good reason for it not to be available.”

There are a couple of good reasons for denying the states bankruptcy protection. One is the fact that there is no such thing as state-bankruptcy law in the United States. A second reason, related to the first, is the Constitution.

In the United States, we have a bankruptcy law for individuals, another one for businesses, and yet another one for municipalities and their subordinate agencies. We do not have a bankruptcy law for the states or for the federal government, for the same reason: They are sovereigns.

The several states are not administrative subdivisions of the federal government. They are powers in their own right, superseded by the U.S. government only in certain matters that involve more than one state………

Because bankruptcy law is federal law, putting states into bankruptcy reorganization would upend our basic constitutional arrangement, making state governments answerable to federal bankruptcy judges and, behind them, to Congress. ……..

Republicans often talk about the public-pension fiasco as though it were a uniquely Democratic problem — Hewitt listed California, Illinois, and Connecticut as states with such troubles. But Senator McConnell’s home state of Kentucky is no less troubled. Oklahoma has substantial unfunded liabilities in its pension system. At the municipal level, Chicago has pension troubles, but so does Dallas.

Badly managed cities and states hope to use the coronavirus epidemic as a pretext for federal bailouts. This is a cynical and shameful ploy: These problems have been decades in the making as states systematically underfund their pension systems. Why do they do that? It is a way to increase compensation for a politically powerful group — government employees — without raising taxes to pay for those benefits, or even to put them on the budget in a halfway honest fashion. (The numbers government budget-writers use to calculate their pension liabilities are fanciful, as obvious an exercise in book-cooking as you will find.) One interest group gets promised benefits in the future, and another gets benefits in the here and now that are paid out of the money that should have been used to fund those pension liabilities. It is a way of spending the same money twice, in effect.

Sovereigns don’t go bankrupt. Sovereigns default………..

Eventually, the political problem becomes a math problem, with the states obligated to spend more money than they have or can borrow. Even the Supreme Court of Oklahoma cannot produce blood from a stone.

The most likely way forward — the only plausible way forward short of gutting the Constitution — is for states to engage in a long, painful, disruptive negotiation with their creditors, their pensioners, and other interested parties. There will be endless lawsuits, unpopular budget cuts, unpopular tax hikes, and much else that is designed to make no one happy except for the lawyers. (The lawyers always get paid.) But these are the decisions the democratically elected representatives of the people of the several states have made, and they will have to live with them.

Call me an optimist, but: The more it hurts, the less likely they are to repeat the error.