In yesterday’s column we examined some jurisdictional barriers for a state that may want to declare bankruptcy. We concluded that the sovereignty issues involved created a huge impediment for a state to pursue legal insolvency. There are other issues that rival the sovereignty one, however, and they may be the most daunting to overcome. Anytime that an entity files for bankruptcy protection some stakeholders’ interests may be weakened or obliterated. Obviously if a state of the federal republic were to declare, the number of stakeholders would be legion.
First in position but probably last in consideration would the residents of the state who had purchased bonds to benefit from the double tax-free advantage. In essence the citizens loaned their state funds for capital improvements and special projects in exchange for their exemption from state and federal income taxes. These investors would probably receive the same level of return as did the corporate bond holders of GM and Chrysler….peanuts. The second group of bondholders is those who are not state residents but do receive the federal tax exemption. They would receive …dusty peanut hulls.
At the point of filing for the bankruptcy protection the state could not pay vendors for products or services without being charged with treating creditors preferentially. There are vendors all over Ohio and the nation who provide products and services to various state agencies, branch locations and offices throughout the state. In all likelihood these businesses would not receive any reimbursement. A similar scenario would be in play for the thousands of consultants and contractors engaged by the state and state departments to provide expertise and talent. The full-time state employees would probably enjoy some element of protection because the court would recognize that the ongoing operations of the state would require their presence. As an aside, a truly fiscally-conservative, constitutional –obeying jurist COULD capture the opportunity to pare the workforce to an affordable and constitutional number. It is unlikely, however.
Given recent history it seems probable that the most protected class of creditors will be the pension plans which are the primary tipping point of the problem. The Public Employees Retirement System (PERS) and the Teachers’ Retirement system represent the largest portion of the underfunded future needs, but also include the largest, most vocal unions in the statewide system. Consider, for example, how many voters or activists are represented by Ohio’s teachers and their families. In addition to the seven hundred or so public schools there is the extensive state university system plus the many community colleges, branches and specialty schools in the state. Beaucoup numbers of literate activists who have a very large stake in the outcome of Ohio reorganization. All in all, the interested parties who would be clamoring to protect their interests and their assets in the event of a bankrupt state of Ohio are massive in number and loaded with political clout.
Even if legal insolvency provided the best remedy for correcting the excesses of an upside down state, the difficulties of structuring an orderly process that doesn’t undermine the sovereignty of the state, but yet protects the interests of some very powerful stakeholders could be insurmountable. Could the federal court impose a new state constitution on the citizens of the state? Could the court require compliance with federal mandates, or better yet, demand that the state nullify costly unconstitutional federal demands? Would the sovereign state be compelled to follow the rulings of the court, or could they be “cherry-picked” to recognize political realities? How extensive or how limited would the court’s power be? How many of the thousands of vehicles owned by the state could be auctioned? Anyone want a yellow dump truck that sleeps three?
No comments:
Post a Comment