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Bankruptcy law for states could carry risk, bring opportunity

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Monday, Feb. 14, 2011

HARRISBURG -- The notion that deficit-strapped states should be able to declare bankruptcy, as some members of Congress and a national taxpayers group believe, is "really stupid," says Miriam Fox, a Democratic staffer for the Pennsylvania House Appropriations Committee.

"It would ruin your credit rating," Fox said.

But proponents including Americans for Tax Reform say bankruptcy could be a way to wipe out state debt overnight, wrest concessions from public employee unions and deal with longtime obligations for pensions and health care.

States are not permitted to seek bankruptcy protection in federal courts. Corporations file for bankruptcy, as do some municipalities. Last year, 1.5 million Americans filed. Some members of Congress are considering a law to allow states to file for bankruptcy. House Judiciary Chairman Lamar Smith, R-Texas, plans to hold a hearing this month on the matter.

Such a change is needed "so governments can say to public employee unions, 'If you're not prepared to make a reasonable deal, a judge will make a reasonable deal,'" former House Speaker Newt Gingrich told the Tribune-Review.

Gingrich, a potential Republican presidential candidate, disputes the notion that bankruptcy would ruin a state's credit rating and prevent it from securing loans. He cites the recovery of Orange County, Calif., four years after it filed for bankruptcy in 1994.

The fact Congress is considering legislation "serves notice on states: 'Don't come to Washington for a bailout,' " Gingrich said.

Combined, states' deficits next fiscal year will reach a projected $125 billion, says Iris Lav of the Washington-based Center on Budget and Policy Priorities. And those states haven't banked enough money to cover pensions coming due. Estimates for the collective pension shortfall range from $500 billion to $3 trillion.

Pennsylvania's deficit is estimated at $4 billion for the budget year beginning July 1.

State lawmakers say no one in the General Assembly is talking about advocating for the right to file bankruptcy -- and it's not likely to happen.

However, Rep. Scott Perry, R-York County, said it shouldn't be ruled out.

"When you have a significant crisis, you have to look at all the options," Perry said.

A bankruptcy option for states "sounds like a good option, particularly if you can rein in the out-of-control costs from unionized employee pensions, health care and salaries," said Matthew Brouillette, president of the Commonwealth Foundation in Harrisburg.

"But it couldn't functionally work in the same way that it does for businesses or individuals," Brouillette said. And it could become an "easy way out" for states, which could take the same steps to control money problems now, "if there's the political will and courage to do so," he said.

U.S. House Majority Leader Eric Cantor, R-Va., contends states don't need bankruptcy protection because they have other ways to handle ballooning debt, such as cutting spending, increasing taxes and negotiating with unions.

The risks are high. A state's bankrtupcy could get tied up in court proceedings for years, as sides squabble over deals that might bring only scant relief in the end. Even discussing the idea could spook investors and rattle states' fragile finances. States need investors to buy their bonds, and demand began dropping before talk of a bankruptcy option spread.

"I think we can correct our deficit," said Bill Adolph, R-Delaware County, chairman of the Pennsylvania House Appropriations Committee.

The proposal in Washington might gain traction if the economy were spiraling downward.

"I think Pennsylvania is slowly recovering," Adolph said. Pennsylvania is coming off four straight months of higher-than-anticipated revenue, he said.

Nationally, state tax revenue is starting to recover as the economy improves, and as states raise taxes. Revenue rose 6.9 percent in the October-December quarter, based on early data from 41 states, according to a report from the Nelson A. Rockefeller Institute.

But in Pennsylvania, Gov. Tom Corbett vowed not to raise taxes to tackle the deficit.

Adolph notes that although Pennsylvania's deficit is huge, it doesn't begin to approach California's $26 billion budget gap -- a figure that exceeds Pennsylvania's state revenue.

As for the bankruptcy option, state Rep. Joe Markosek of Monroeville, ranking Democrat on the budget panel, said no one he knows in the Capitol is considering it.

Yet, Rep. John Bear, R-Lancaster County, sees it as an opportunity. Companies in bankruptcy restructure, and even without bankruptcy, Pennsylvania's legislators and governor have a chance to restructure government, Bear said.

"If you went to the public and said, 'The old model isn't working; we need a new paradigm,' (and) if you want fundamental change, bold action, now is the time," Bear said.

He said that means re-evaluating all aspects of government -- deciding even such things as whether municipal authorities are necessary, whether to share services and how to compensate public employees.

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