Symposium 2012: More and more states and municipalities are facing bankruptcy. Is it up to the federal government and taxpayers to bail them out?

Sydney: This is a difficult question. The Federal Government can’t let the States and other municipalities to go broke but says it doesn’t have the money to bail them out. However, the Federal Reserve could buy municipal bonds to help the States. This would cost hundreds of billions of dollars but when you consider that the government gave trillions of dollars to the banks because they couldn’t be allowed to fail the money needed to save States and municipalities seems like a drop in the ocean. 

The Federal Reserve Chairman Ben Bernanke says that the Fed does not get involved in State and municipal affairs but what does he think is going to happen if it doesn’t? Does the government seriously believe that States can be allowed to go bankrupt? This is a ridiculous proposition. North Dakota has shown that there are alternatives. That State set up its own state owned bank, the Bank of North Dakota. The bank can provide the State Government with low interest credit thereby saving it from financial problems. There is no reason why other states couldn’t follow this model. Municipalities within these states could also get similar loans from these state-owned banks.
Michigan: Our Federal government cannot bail itself out of trouble let alone our states and municipalities. States and municipalities are going to have to step up and take charge of their own finances. This means that we may have to raise state and local taxes. We may have to delete some cash draining agencies. We may have to pay extra for some services. We may have to take charge of building our own roads and make them toll roads.
Cartwright: Managed bankruptcies are the answer not federal taxpayer bailouts. Why should the taxpayers in states where legislators have been financially responsible be forced to bailout states like California that haven’t been financially responsible and have been economically hijacked by unions?

Individuals and companies go bankrupt each and every day. They go through the legal process of reorganization or liquidation. Let state or local government go through the same legal process of reorganization. That’s the only way places like California are going to get their finances in order. The bankruptcy court would void employment contracts with unions and force a renegotiation that is in the best financial interests of the taxpayers.

No bailouts for states or municipalities! In fact, I don’t think the federal government should be bailing any business or any industry or anyone else out.

RMC3: I absolutely agree with my colleague. There are way too many states and municipalities that have gotten in financial trouble because of their retirement obligations for union workers and employment agreements with union workers. Let the bankruptcy court work it all out. If we start bailing out states and municipalities, we create a moral hazard. What incentive is there for other states to manage their budgets responsibly? If you’re in a state with a budget surplus and the federal government has just bailed out California, why should your state be responsible? Guess what, these states wouldn’t be responsible because they know that they’ll eventually get bailed out by the federal government. Then, it becomes an unsustainable cycle, and no good would come from it.

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