Telling the truth about state and local finance.

• Author: Berger, Barrie Tabin
• Position: Federal Focus

Reports in the media and by industry experts and national policymakers have focused overwhelming attention on the fiscal challenges faced by state and local governments. The inaccuracies repeated in these reports--that the economic downturn, combined with excessive pension liabilities, would cause local government bankruptcies, bond defaults, and ultimately cause requests for federal government bailouts--encouraged conversations about legislation that would permit states to declare bankruptcy, a move that is not currently within their legal authority. Concerned about the additional fiscal uncertainty this situation was causing, the Government Finance Officers Association joined other national associations that represent the interests of states and local governments to create a fact sheet that would help set the record straight on important state and municipal finance issues.

The fact sheet, Facts You Should Know, discusses the way states and local governments can use bankruptcy law, as well as outlining state and local government's historic role in issuing tax-exempt municipal securities and providing pension plans. (1) The fact sheet is intended to educate members of the media, policymakers, industry experts, and the public about the true fiscal conditions of state and local governments. It provides accurate information about how the Great Recession has affected state and local budgets and the implications for the municipal bond market and the sustainability of public pension plans.

Facts You Should Know explains that state leaders are not seeking bankruptcy protection and that municipal leaders rarely pursue bankruptcy, and then only as a last resort. The facts also demonstrate that few state and local governments have defaulted on their debt, and bond investors have always been protected, even in the rare case of a municipality bankruptcy. Furthermore, state and local government pension plans have $2.7 trillion set aside in pension trusts to pay benefits to current and future retirees and are well positioned to weather the current economic crisis.

STATE AND LOCAL BANKRUPTCY

Early in the year, former House Speaker Newt Gingrich began discussions about the need to enact legislation permitting states to declare bankruptcy. Gingrich and other proponents of the idea, including former Florida Governor Jeb Bush, argued that bankruptcy could be a viable alternative for overburdened, underfunded states that might otherwise seek a federal bailout to help meet their fiscal obligations. Proponents acknowledged that such a measure would first have to clear significant constitutional hurdles, but that it might ultimately allow states to alter their contractual promises to pay pension benefits to current retirees and thus eliminate or significantly reduce their pension obligations.

Organizations representing states and local governments immediately spoke out against a state bankruptcy measure. GFOA Executive Director Jeffrey Esser expressed opposition to federal proposals that would allow states to declare bankruptcy, noting that "political figures calling for state government bankruptcy authority have unintentionally injected fear into the municipal bond market and frightened the retail investor market." (2)

The National Governor's Association (NGA) issued the following brief statement regarding bankruptcy proposals for...