When States Go Broke : The Origins, Context, and Solutions for the American States in Fiscal Crisis

When States Go Broke collects insights and analysis from leading academics and practitioners that discuss the ongoing fiscal crisis among the American states. No one disagrees with the idea that the states face enormous political and fiscal challenges. There is, however, little consensus on how to fix the perennial problems associated with these challenges. This volume fills an important gap in the dialogue by offering an academic analysis of the many issues broached by these debates. Leading scholars in bankruptcy, constitutional law, labor law, history, political science, and economics have individually contributed their assessments of the origins, context, and potential solutions for the states in crisis. It presents readers – academics, policy makers, and concerned citizens alike – with the resources to begin and continue that important, solution-oriented conversation. Cover ......Page 1 WHEN STATES GO BROKE......Page 3 Title......Page 5 Copyright......Page 6 Contents......Page 7 Figures......Page 9 Tables......Page 11 Contributors......Page 13 Acknowledgments......Page 15 Introduction: The Perennial Crisis for the American States......Page 17 PART I: The Origins of the States in Fiscal Crisis......Page 23 I: TAXING, SPENDING, AND BORROWING......Page 25 II. THE STATE GOVERNMENT FISC IN AMERICAN HISTORY......Page 27 III. BUDGETS AND DEBTS......Page 31 IV. FISCAL CONSTITUTIONS......Page 35 Debt Procedures and Limitations......Page 40 Balanced Budget Restrictions......Page 43 RDFs and TELs......Page 45 VI. HISTORICAL PATTERNS AND RECURSIVE INSTITUTIONAL CHANGE......Page 47 VII. LESSONS......Page 52 REFERENCES......Page 55 2: Obligations Without the Power to Fund Them......Page 56 II. A BRIEF PRIMER ON THE FISCAL IMPLICATIONS OF THE FEDERAL SYSTEM......Page 58 III. HALFWAY TO KENYESIANISM– THE RISE OF COUNTERCYCLICAL EXPENDITURES AT THE STATE LEVEL......Page 61 IV. MEDICAID – THE EXPANSION OF THE UNEMPLOYMENT INSURANCE MODEL OF COUNTERCYCLICAL SPENDING......Page 64 V. TAXES – STRUCTURAL INADEQUACY AND PRO-CYCLICALITY......Page 66 VI. THE CHANGING NATURE OF ECONOMIC CYCLES......Page 68 VII. CONSEQUENCES – PART I – THE SOURCES AND MAGNITUDE OF STATE SHORTFALLS......Page 69 IX. SOLUTIONS – REFEDERALIZATION OF COUNTERCYCLICAL SPENDING OR STRUCTURED FEDERAL SUPPORT FOR STATES......Page 70 3: Public Pension Pressures in the United States......Page 73 I. A BRIEF BACKGROUND ON STATE PENSION PLANS......Page 74 II. THE STRUCTURE OF PUBLIC SECTOR-DEFINED BENEFIT PLANS......Page 75 III. RECENT CONCERNS ABOUT STATE PENSION PLANS......Page 76 IV. HOW IMPORTANT IS THIS?......Page 81 V. REFORMS UNDERWAY......Page 83 CONCLUSIONS......Page 86 REFERENCES......Page 87 4: Structural Challenges in State Budgeting......Page 93 I. REVENUE CHALLENGES......Page 94 II. VOLATILITY......Page 95 III. SALES TAX INSUFFICIENCY......Page 98 IV. PROPERTY TAX LIMITATIONS......Page 100 V. EXPENDITURE CHALLENGES......Page 102 VII. THE TEACHER EXPLOSION......Page 103 VIII. RISING MEDICAL COSTS......Page 105 IX. EMPLOYEE BENEFITS......Page 106 XI. TAX REFORM FOR STATES......Page 108 XII. CONTROLLING HEALTH CARE AND EDUCATION COSTS......Page 110 PART II: The Legal and Political Context of Public Debt......Page 113 5: What States Can Learn From Municipal Insolvency......Page 115 I. THE LIMITED UTILITY OF MUNICIPAL BANKRUPTCY......Page 116 II. CRITERIA FOR ENTERING BANKRUPTCY......Page 119 State Default......Page 124 Federal Bailout......Page 133 CONCLUSION......Page 137 INTRODUCTION......Page 139 I. THE PROBLEM OF FISCAL DISCIPLINE IN FEDERATIONS......Page 141 II. TWO PATHS TO FISCAL DISCIPLINE: HIERARCHY AND MARKETS......Page 143 III. WHEN FEDERATIONS FAIL......Page 145 IV. DEFAULT AND THE FOUNDATIONS OF MARKET DISCIPLINE......Page 147 V. IMPLICIT BAILOUTS AND THE CHALLENGE TO MARKET DISCIPLINE......Page 149 VI. CAN MARKET DISCIPLINE SURVIVE?......Page 151 VII. TOWARD A REFORM AGENDA......Page 157 REFERENCES......Page 161 INTRODUCTION......Page 162 I. DEBT AND DISTRESS......Page 166 II. SOVEREIGN DEBT RESTRUCTURING......Page 174 Episodes......Page 176 Costs and Consequences......Page 187 Lessons for States......Page 189 Motivations......Page 192 Proposals......Page 194 Obstacles and Objections......Page 199 Relevance for States......Page 201 CONCLUSION......Page 202 PART III: Evaluating Solutions......Page 205 INTRODUCTION......Page 207 I. WHAT DO WE MEAN BY BANKRUPTCY?......Page 208 II. A CASE FOR STATE BANKRUPTCY......Page 210 III. THE GENERAL FRAMEWORK......Page 213 An Immediate Discharge......Page 216 A Simple Voting Framework......Page 218 V. INITIATION REQUIREMENTS......Page 219 VI. WHO CAN INITIATE?......Page 221 VII. PROPOSING A REORGANIZATION PLAN......Page 222 VIII. OTHER PROVISIONS......Page 223 IX. CHECKS AND GUILLOTINE PROVISIONS......Page 225 X. FINANCING THE BANKRUPTCY PROCESS......Page 226 XI. THE BANKRUPTCY COURT......Page 228 CONCLUSION......Page 229 9: Fiscal Federalism and the Limits of Bankruptcy......Page 230 I. FISCAL FEDERALISM AND STATE FINANCIAL DISTRESS......Page 232 II. WHAT BANKRUPTCY CANNOT DO: CURE BAD BUSINESS MODELS......Page 238 III. BANKRUPTCY AS A POLITICAL TOOL......Page 240 CONCLUSION......Page 244 10: Extending Bankruptcy Law to States......Page 245 I. WHAT IS THE SIGNIFICANCE OF THE FACT THAT STATES ARE SOVEREIGN WHEREAS MUNICIPALITIES ARE NOT?......Page 247 II. HOW MUCH DOES BANKRUPTCY INTRUDE INTO SOVEREIGN POWERS?......Page 248 III. IS THE VOLUNTARY NATURE OF STATE BANKRUPTCY ENOUGH TO MAKE IT CONSTITUTIONAL?......Page 250 CONCLUSION......Page 252 INTRODUCTION: BANKRUPTCY FOR STATES......Page 253 I. STATE OR FEDERAL LEGISLATION (OR BOTH)?......Page 257 II. THE POLICY IMPLICATIONS OF RETROACTIVITY......Page 260 The States’ Faith and Credit Pledge......Page 262 The Contracts Clause......Page 265 CONCLUSION......Page 268 INTRODUCTION......Page 269 Public Sector Labor and Employment Law......Page 272 Labor Costs in Government Budgets......Page 277 Public Sector Employees Are Paid Less Than Comparable Private Sector Employees......Page 280 Pension Benefits and Coverage in the Public Sector: An Overview......Page 286 The Solvency of Government Pension Funds and Their Impact on State Budgets......Page 289 II. PUBLIC SECTOR BARGAINING DOES NOT CAUSE STATE AND LOCAL BUDGET CRISES......Page 294 California......Page 298 Nevada......Page 302 Texas......Page 305 III. COLLECTIVE BARGAINING AND SOLUTIONS TO STATE BUDGET PROBLEMS......Page 308 Bankruptcy......Page 309 Repudiation and the Contract Clause......Page 311 Real Solutions......Page 313 CONCLUSION......Page 319 APPENDIX......Page 321 Epilogue......Page 331 Index......Page 333 Introduction : the perennial crisis / Peter Conti-Brown The problem: the states in fiscal crisis Fiscal constitutions and fiscal crises : a history / Isabel Rodriguez-Tejedo, John Wallis Obligations without the power to fund them : the origins, consequences, and possible solution to the fiscal crisis of the states / Damon Silvers Public pension pressures in the United States / Olivia Mitchell Structural challenges in state budgeting / Josh Barro What states can learn from municipal insolvency / Clayton Gillette Market discipline and U.S. federalism / Jonathan Rodden American states and sovereign debt restructuring : lessons and cautionary tales / Adam Feibelman State bankruptcy from the ground up / David Skeel Fiscal federalism and the limits of bankruptcy / Adam Levitin Extending bankruptcy law to states : is it constitutional? / Michael McConnell Bankruptcy for the states and by the states / George Triantis Labor and the states' fiscal problems: not the problem but perhaps part of the solution / Catherine Fisk, Brian Olney Epilogue / David Skeel. When States Go Broke collects insights and analyses from leading academics and practitioners who discuss the ongoing fiscal crisis among the American states. No one disagrees with the idea that the states face enormous political and fiscal challenges. There is, however, little consensus on how to fix the perennial problems associated with these challenges. This volume fills an important gap in the dialogue by offering an academic analysis of the many issues broached by these debates. Leading scholars in bankruptcy, constitutional law, labor law, history, political science, and economics have individually contributed their assessments of the origins, context, and potential solutions for the states in crisis. It presents readers--academics, policymakers, and concerned citizens alike--with the resources to begin and continue that important, solution-oriented conversation When States Go Broke discusses the ongoing fiscal crisis among the American states. No one disagrees with the idea that the states face enormous political and fiscal challenges. This volume fills an important gap in the dialogue by offering an academic analysis of the many issues broached by these debates.