The Bankruptcy Option

Given the long political, economic, electoral, etc. track record of this state, many believe that the only solution to fixing Rhode Island lay in bankruptcy. Well, if that is indeed a solution, then this post by Richard Epstein is concisely informative on the topic. Epstein explains the how’s and why’s, but then concludes that bankruptcy probably isn’t an option.

I don’t think that full-fledged bankruptcy is a realistic prospect as of now. I think that the much more sensible approach is to side-step the bankruptcy proceedings and find ways to attack the union pension obligations directly, given their enormous size. It is odd that these days the only sacred contracts are those which the state enters into with unions for the benefit of their members.

Nonetheless, the courts would eventually get involved:

The key question is whether it will be possible to persuade the courts that these pension agreements were the result of political self-dealing, which means that they should be set aside unless it could be shown that the state received fair value for the services rendered when it made those deals. I think that case is bold but winnable, yet only when the situation becomes truly desperate. Funding that litigation will take some bankrolling, but the corporate-law analogies on self-dealing make it pretty clear that the state legislatures violated all their duties of loyalty to the public at large when they entered into deals from which union pension funds got all the upside and everyone else got the downside. Not nice. Undoing it is the work of the next generation.

That all strikes me as speculative at best, at least in Rhode Island. It just isn’t the way this state works.

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Tommy Cranston
Tommy Cranston
13 years ago

The following is Dick Morris’s brilliant idea for the Republican House’s answer to January’s certain cries for more bailout money to the unions-oops the states: SMASH THE UNION THUG-OCRACY By Dick Morris And Eileen McGann 11.8.2010 Share this article One of the first orders of business to come up in the new Republican-controlled House of Representatives will be the demand for bailouts of states where expenditures have been especially profligate – California, New York, Michigan, Illinois, and Connecticut. Throughout 2009 and 2010, these states governments have stayed above water by repeated infusions of federal cash. These one-shot stimulus payments must be repeated each year. They are all non-recurring expenditures requiring separate annual appropriations. The Republican House must say no and hold the line, stopping this raid on the federal Treasury. The cry in the caucus must ring loud: “No More Bailouts!” But, as the Republicans demand fiscal discipline and refuse to make the citizens of the other, more responsible states subsidize the wayward finances of California and New York, we need to focus on the union power that has forced states, localities, and school boards to raise taxes, borrow money, and – ultimately – to depend on federal bailouts. These unions have forced contracts on their states, localities, and school boards which provide for ever higher wages, benefits, and pensions. Even now, teachers are on strike in a suburb of Pittsburgh because they feel a 4.5% annual wage increase is inadequate! The House must create a federal bankruptcy procedure for states that cannot make ends meet requiring, as happens in corporate bankruptcies, that the state governments abrogate all their union contracts. The new state bankruptcy procedure should offer all states – and through them, their localities, counties, and school boards — the ability to reorganize their finances free of the… Read more »

13 years ago

There is no legal path for a state to declare bankruptcy although in essence defaulting on payments due is for all intent and purpose – bankruptcy.
The Federal Government would step in before a state went under most likely.
The Feds turned a cold shoulder to Sundlans plea for help re the credit union crisis but they have bled billions for private insurance company AIG. That always gets my blood pressure up to think of that.

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