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State Bankruptcy Proposals Pit Rich Bondholders against Middle Income Workers

By David Leibowitz, Illinois and Wisconsin Bankruptcy

Beware of Greeks bearing gifts. When Newt Gingrich suggests that states need the right to file bankruptcy, he can be up to no good. Who benefits from states filing bankruptcy?  The question is a matter of priorities.  Fat cat Wall Street bondholders are scared witless about the possibility of their triple-A municipal bonds going south if states default. On the other hand, reasonably well-paid state workers, including teachers covered by state pension plans, feel that they have vested rights to very handsome pensions after retiring at a relatively early age compared to workers in the private sector.

Remember when Ronald Reagan busted the air traffic controller’s union? They said it couldn’t be done, but it was and he did.  State bankruptcy cases would bust government worker unions on a scale unprecedented in American history.  All this would be done in the name of protecting the states against exorbitant pensions of state workers with bloated union contracts. I can hear the drumbeat from the extreme-right-wing think tanks already.

But who benefits from this?  Do you think that taxes will go down for the average person.  Heck no.  Do you think that this will help the financial condition of the average person? Heck no.  In fact, lots of families, including retirees who are on state funded pensions will find themselves in financial peril, facing personal bankruptcy, if states are allowed to go bankrupt and default on their public obligations.  No, the benefit will go to the Wall Street bondholders nicely clipping their tax-exempt coupons in their fancy houses and fancy country clubs.

Be careful what you wish for, you might just get it.

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Full post as published by Bankruptcy Law Network on January 22, 2011 (boomark / email).