With some forty-four states and the District of Columbia projecting budget shortfalls for fiscal year 2012 (which begins in July of this year), some cash-stricken states are quietly looking into the possibility of declaring bankruptcy, GM-style. Although sovereign states are barred from seeking protection in federal bankruptcy court, policymakers are investigating workarounds that would allow states to get out from under crushing obligations—especially the Cadillac pensions and healthcare plans promised to retired public workers (including educators). By no means is bankruptcy the easy way out for struggling states. Even the conversation of such has reverberating, and sometimes destabilizing, consequences. (It could rattle the public sector bond market, for instance.) However, discussions about something as grave as bankruptcy (and the potential of public-union employees losing at least part of their pensions) may give state lawmakers an unprecedented amount of leverage at the bargaining table. Education reformers may no longer be able to buy off defenders of the status quo with sweet-deal carrots, but they may now have more power to make needed changes by waving this harsh but necessary stick.
“A Path Is Sought for States to Escape Their Debt Burdens,” by Mary Williams Walsh, New York Times, January 20, 2011.