Can/Should/Will States File Bankruptcy?

This is going to get ugly.  Let me say up front that the biggest problem facing State over-spending and massive budget deficits is the public employee benefit entitlement programs in place.  And this is where it will get the ugliest.  I will also say honestly up front that it is my view, based on first-hand knowledge of the incredible scope and size of benefits awarded to State employees that this is where the budget scalpel needs to fall the hardest.  Just as one example:  the Superintendent of the Aurora Public School System in Colorado - only the 5th or 6th largest district in the State - earns $750,000/year in salary and benefits.  This includes both his military benefits AND his current compensation.  To say that this kind of pay for someone like this is absurd would be an understatement.  It's an egregious insult and non-punishable crime to the Taxpayers.  That example may seem extreme, but in general any tenured State/Federal employee can retire after 20 years and take another job AND collect all the benefits from their previous job.  I personally know some doing that.  The bottom line is that these kind of benefits/entitlements do not exist in the private sector other than for the over-priveledged upper management.

The average compensation, including benefits, for the public employees was over $108,000/yr. vs. just under $69,000/yr for that of private sector workers.  This was for 2008.  I'm sure the disparity is even wider now.  Here is the source article for this data:  LINK.  I don't know about anyone else, but I find this to be beyond absurd.  Unfortunately for the privately employed taxpayer, who can have his employment and benefits terminated when a Company needs to cut expenses, the Government rarely pares its expenses and the associated benefits of all workers are Constitutionally guaranteed in most States.

The only possible mechanism for changing the public employee compensation/benefit scheme would be to permit States to file bankruptcy, which is currently not allowed by law.  This article in the NY Times discusses the current status of this issue as it enters into the debate arena on Capitol Hill:  LINK. 

The fact of the matter is that most States are running big spending deficits - and some like California and Illionois are technically insolvent - and the cost of the public workforce is the largest expense burden.  Even in the rosiest economic scenarios, the current system is not sustainable and it will require some drastic expense-cutting measures.  Of course, unless the system can be restructured to enable the Federal Government to ramp up its money printing and monetize State deficit/debt burdens, the only viable alternative is to legislate the ability of States to file bankruptcy in order to extinguish and restructure their obligations.  This will require a lot of pain to be endured by those dependent on the State for cash flow.  Two of the biggest consituents of this are public employees and municipal bondholders.  The most equitable solution would to require substantial sacrifice by both.

Unfortunately, the likely path of legislation will create a mechanism which will shift the States' burdens onto the Federal Government.  The NY Times article linked above hints of this possibility. Ironically, the person in the article who represents the public employee special interest group uses the GM bailout as his model for Federal involvement.  But recall that GM was made a ward of the Taxpayer and, despite issuing stock in a quasi-privatization of sorts, is still dependent on Federal guarantees.  Most people do not realize this, but the Government subsidizes every lease issued to finance the purchase of GM vehicles.  In other words, the GM bailout is a horrific model to use in order to create a mechanism for reorganizing State insolvency because it would involve shifting State insolvency onto the Federal balance sheet - a mere rearrangement of the deck chairs on the Titanic.

The bottom line is that public employee compensation needs to brought into line with that of the private sector.  I fail to see any reason whatsoever as to why public sector workers are awarded such a rich premium to the private market for their labor services.  At the same time, those who have financed spending at the State level - i.e. muni bond investors - should also be required to take restructuring haircuts on their investments, which would be the free market solution for sloppy investment due diligence.  The path for this solution would be to allow States to file bankruptcy using the same model applied to corporations and private individuals.  After all, can anyone out there give me just one good reason why the above two constituents should be exempted from the discipline of the (relatively) free market to which the rest of us are exposed?