Thursday, January 27, 2011

Bring in the Creditors!

One of the greatest problems with government worker unions is the lack of a check on power. In private business, unions can never extort too much out of customers, shareholders, and owners because the company must at least break even to continue paying them, but in government, as just happened with the 66% increase in income tax in Illinois, the ability to tax and extort the people allows union power to grow unchecked. That's why Hailing from Georgia is giving the following proposal of Jeb Bush and Newt Gingrich two thumbs up:
First, as with municipal bankruptcy, it would have to be completely voluntary. This means that neither the federal government nor state creditors could push an unwilling state into bankruptcy, no matter how catastrophic the state's finances may be, as this would violate the U.S. Constitution's protection for a state's sovereign immunity.

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc. The new law could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers. The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.

Third, the new law should allow for the restructuring of a state's debt and other contractual obligations. In a voluntary bankruptcy scenario, states, like municipalities, will have every incentive to file a reorganization plan that protects state bondholder claims and their ultimate recovery. States will evaluate their future access to bond markets and their prospective borrowing rates as they formulate the optimal restructuring plan. (LA Times)
Now states, like private industry, will have a genuine check on union power - the ability to eradicate their arrangements if negotiations bring them to the point of bankruptcy! And just like in private bankruptcy, it can be challenged in court if states are abusing the system. Not state courts though...

This is probably not going to work for the Federal Government, which has no singular higher authority to turn to for such dispute resolution, and so we recommend that this motion be accompanied by a BAN on federal unionization.

This conclusion is from the facts. The facts show two things: 1) unions in government work every bit as bad in practice as they do in economic theory, as the recent affairs of California and Greece attest to, and 2) municipal bankruptcy, which has been an option for cities, counties, and towns since the 1930's, has helped many a municipality, from NYC in 1975* to Orange County in 1994, to fix their affairs. In fact, in Orange county, the restructuring was so successful that they were able to repay 100% of the principal without raising taxes a dime, while instituting useful reforms to prevent a rehash of the events (ERisk):
The new Orange County investment policy statement establishes safety of principal, and liquidity, as the primary objectives of the fund, with yield as a secondary objective. More specifically it prohibits borrowing for investment purposes (ie, leverage), reverse repurchase agreements, most kinds of structured notes (such as inverse floaters) and derivatives such as options. The same document bans the treasury oversight committee and other designated employees from receiving gifts, and obliges them to disclose economic interests and conflicts of interest. The county treasurer now has to submit monthly reports to the investors and other key county officers that contain sufficient information to permit an informed outside reader to evaluate the performance of the investment programme.
Now it is true that for munie investors, who will now see their risk in investment substantially increased, this isn't 100% a good deal. However, this too in the end is probably a good thing, as it makes selling government debt much more difficult, requiring higher interest, and will thus discourage state governments from running their bills so high to begin with in the future. Sorry munies, but we have bigger responsibilities then investors who, whether they knew it or not, volunteered to take a chance. It's time to bring in the creditors, and with them, bankruptcy court!

*Note: NYC did not actually declare bankruptcy. Rather, mayor Abraham Beame, used the threat of it to coaxe a overextended teachers union to invest 150 million of its pension funds in municipal bonds. He then acquire a large loan from the federal government. Not long after, Ed Koch and Rudy Giuliani began confronting NYC's debt problems, and largely solved them, and the days of over extension by NYC municipal unions were largely over for decades. (NY Times)


Chudex's said...

nice read and good information. thanks

FishHawk said...

What I keep hoping to see is a president, who is truly serious about getting rid of as much of the corruption and incompetence in our governmental agencies as possible. For I have no doubt that we would have more than enough money to do all sorts of wonderful things and lower taxes if all of the funds that are wasted each year were drastically reduced. All of this would also apply to state and local governmental entities with the right governors and mayors in place, of course.

Jeremy Janson said...

@FishHawk: Well unfortunately you get all kinds in the Oval Office, which is why our founding fathers were quite right to insist on a strong process. Getting good people is a temporary fix, getting a good process will last much longer, and in that way I suppose we can be thankful when fate hands us a lemon.

@Chudex: Great to see you, hope you'll enjoy this blog a few more times!