3 points about Ted Nesi‘s WPRI-TV (CBS 12) interview with University of Pennsylvania Law Professor and bankruptcy expert David Skeel are worth immediately noting:
- In the first half of the interview, Prof. Skeel advances that same argument, based on current law, that we at Anchor Rising have been making from a wider historical perspective for a while now — government has no inherent authority to make promises to trade away that which it does not possess…
DS: The question is if a city or a state makes a pension promise, but does not fund the promises – which has been true in many states in recent years – what exactly is protected in the event of a default or of bankruptcy? A lot of people assume that what’s protected is the full promise, even if there’s no funding behind it.This portion of the discussion should be of particular interest to those who want to invoke the “police power” as being central to the solution to Rhode Island’s government-financing crisis. In particular, a strong case can be made that the future is best served not by expanding the police power to new circumstances, but instead by enforcing the proper limits on the government’s appropriations power, an idea implicit in Prof. Skeel’s argument, i.e. the government cannot legitimately promise everything because it does not own everything.
Although this is certainly not free from doubt – this is unchartered territory in many respects – my view is that there’s a good argument that what’s protected is the amount of money that’s been set aside. Pension obligations are a form of what we refer to in the law as a property right, and other kinds of property rights are protected up to the value of the property that’s set aside for them. So if somebody has collateral for a transaction, we treat that promise as sacrosanct up to the value of the collateral.
- Towards the end of the interview, Prof. Skeel explains that one possible first-cut common-sense response to the idea of a bond default — if there’s a real price to risk, then bondholders should understand that there’s a real possibility of not getting every payment — is essentially correct…
TN: The argument I always hear back here is that Rhode Island governments can’t operate without being able to borrow money, and that without this protection we could be cut off from the bond markets. What do you make of that argument?
DS: I disagree with the assumptions underlying the argument, which is that if you don’t completely protect bondholders all possibility of borrowing will disappear. I just don’t think there’s evidence of that. The bond market view tends to be if you do anything that prevents us from getting 100 cents on the dollar, the world is going to come to an end. And my view is, there’s just no evidence of that. The evidence is really to the contrary – healthy municipalities will pay less and have better access to the bond markets than sick ones, and the restructuring of one city is a lot less likely to have contagion effects on other cities in those states than people in the bond market tend to believe.
I just don’t find these kinds of arguments compelling. For instance, Greece is restructuring its bond markets severely right now – the bond markets have not shut down in Europe.
- Finally, Newt Gingrich and Rick Santorum would like the media and academia a lot more, if every interaction between media and academics covered the details as clearly and concisely as this interview does.