State Bankruptcy Bill to Gut Pensions!

Submitted by SadInAmerica on Fri, 01/14/2011 - 2:00am.

There has been an interesting lack of commentary on an effort underway by Newt Gingrich and his allies to enable state governments to declare bankruptcy as a way to slash pension obligations, and given the lack of mention of other creditors, perhaps only pension obligations.

The latest sighting was via an article today in Pensions & Investments:

Former House Speaker and possible GOP presidential contender Newt Gingrich is pushing for federal legislation giving financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees…

Mr. Gingrich discussed the proposal in a Nov. 11 speech before the Institute for Policy Innovation, an anti-big-government group based in Lewisville, Texas. According to a transcript of the speech on Mr. Gingrich’s website,, he said: “I … hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy, so that states like California and New York and Illinois that think they’re going to come to Washington for money can be told, you know, you need to sit down with all your government employee unions and look at their health plans and their pension plans and, frankly, if they don’t want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it, and I would make the federal bankruptcy law prohibit tax increases as part of the solution, so no bankruptcy judge could impose a tax increase on the people of the states.”….

So far, proponents of the legislation said they have not yet recruited a congressional sponsor for the proposed measure. “We’re still shopping for the guy who is going to carry it,” Mr. [Grover] Norquist said.

Nonetheless, union executives are concerned that the proposal — which has been promoted on conservative websites recently — is part of a well-orchestrated and hitherto underground campaign now surfacing as Republicans settle into leadership positions in the new Congress.

I’m quite puzzled by this initiative and wonder if readers have any insight.

First, the obstacle to states filing for bankruptcy is a Constitutional issue, namely sovereign immunity (which is conferred both by the Constitution itself and reinforced by the 11th Amendment). The reason is that bankruptcy court is a Federal court, so it cannot have jurisdiction over a state. So I don’t see how a mere bill changes this issue and the odds of getting a Constitutional amendment passed are just about zero. What am I missing here?

Second, the Gingrich crowd is keen to restrict the judges from imposing new taxes in a bankruptcy. Isn’t this also a Constitutional issue and hence open to court challenge?

Third, the proponents are stressing that the purpose of the bill is to allow states to repudiate union pension funds. There is no mention of, say, getting out of bad swap contacts or renegotiations other creditor interests. Yet the a bankruptcy process puts all creditors on hold as the judge sorts out who gets what based on the seniority of claims and the borrower ability to pay. If the bill is going to restrict judges in terms of options for dealing with the bankrupt estate, does that also mean that it will try to restrain judges from restructuring state obligations ex pensions?

Then again, while it would be nice to think that the Constitutional issues make this all a lot of sound and fury signifying very little except to further intimidate unions, I wouldn’t place much faith in the Roberts court doing the right thing.


Yves Smith - January 11, 2011 - NakedCapitalism 


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Submitted by SadInAmerica on Fri, 01/14/2011 - 2:00am.