Gingrich Proposes Allowing State Bankruptcies, To Escape Pension Obligations

As a way to let state governments, and taxpayers, off the hook for paying the trillions in pension benefits they have promised to their workers, presidential hopeful and former House Speaker Newt Gingrich has proposed changing federal laws, so that states can go bankrupt. True, state pension plans don't currently have enough to pay their pension benefits over time, not to mention all the other stuff that is due more immediately. But we have to remember that states agreed to pay these benefits in negotiations with workers. Legislators should be held accountable, and show the fortitude, to negotiate a solution to reduce them, rather than just walk away.

Photo source: Newt.org
It's the lead story in Pensions & Investments, a trade publication I happen to subscribe to, and on Newt Gingrich's web site there is a transcript of a speech he made to the Institute for Policy Innovation, a group based in Lewisville, Texas, back in November.

I've written on it too, as has my MoneyWatch colleague Carla Fried.

Says the Gringrich site:

Newt is currently pushing for federal legislation that would give financially strapped states the right to file for bankruptcy and renege on pension and other benefit promises made to state employees.

First, under the U.S. Bankruptcy Code -- and bankruptcy is a matter for federal court, not state court -- states cannot petition for bankruptcy. Municipalities and state agencies can, but not states, so a measure such as that Mr. Gingrich is calling for would require a big change to the Bankruptcy Code.

Second, there are contracts in place to pay pension benefits to millions of state workers. The U.S. Constitution protects those contracts, as do state constitutions, and in some states there are even special protections over pension benefits. Those laws stand in the way too.

Contrary to the impression media reports have created, state workers don't run the state pension plans -- legislators do. Much of today's pension problem comes from the late 1990s, when stock prices were high, and legislators increased state workers' benefits. It's simple -- there are a lot of state workers, and using taxpayer money to increase pensions will bag a lot of votes in the next election. Pardon my cynicism.

What's needed here is a collective, negotiated solution, with representation of state workers, taxpayers and legislators. (By the way, in most states, workers make significant contributions to their retirement, so it's not all "taxpayer money.")

And like any government spending and borrowing issue, it affects future generations, so they should have a seat at the table, too. Mr. Gingrich wants to let states blame the unions and simply walk away -- that can't be allowed to happen because the current fiscal crisis is hard to work out. More to follow on this one.