State Bankruptcies Should Cause Concern for All Americans

State Bankruptcies Should Cause Concern for All Americans

Aside from the issues of a potential violation of the Constitution, the costs, and the effect on the state's municipal bonds, and the question of who in a state could declare bankruptcy for the state, a state filing for bankruptcy should raise concerns for every American. Over a trillion dollars were spent on various bailout programs, most of which went to banks and Wall Street.

Wall Street is enjoying record profits and paying out near record bonuses. At the same time, states and municipalities across the United States are suffering and in the midst of budget catastrophes.

So, the solution being kicked around Washington is to amend bankruptcy laws so that states can reap the same benefits as municipalities, including that unfunded pensions become unsecured claims that likely will not get much of a dividend. Investors in the state's bonds could likewise end up with unsecured claims. Ironically, a major reason proponents argue to amend bankruptcy legislation is to prevent states from looking for handouts to their financial woes from the federal government.

But, the biggest reason behind allowing state to file bankruptcy is to change the pension and healthcare plans which are an enormous burden on the state budget. Many state workers have traded higher salaries in the private sector for the stability and pensions that accompany working for the state.

Cutting the pension obligations of for-profit corporation that declare bankruptcy makes some sense, but for a state to do the same does not pass the smell test. Not to mention, the huge drain this new group of people will put on the federal government to compensate for their loss of benefits.

The United States has the lowest effective tax rates since the Depression with the richest taxpayers paying close to 90% in the 1930′s. Nevertheless, the taxpayer was tasked with bailing out Wall Street and the banks without an increase in taxes. Now, rather than requesting those who can best afford it to step up and help increase revenue of their states, state employees will bear a big part of the burden of bailing out their states for which they have worked at lower rates of pay than in the private sector.

Would we be hearing of the possibility of states' bankruptcies if these bankruptcies would put the pensions of the members of Congress at risk?

Read more articles about consumer debt by Ted Connolly, co-author of The Road Out of Debt