2011: The year of insolvency for some states

For most of this year, the state of Illinois has lacked the money to pay its bills. Some of its employees have been evicted from their offices for nonpayment of rent, social service groups have laid off hundreds of workers while waiting for checks, pharmacies have closed for lack of Medicaid payments. Faced with $4.5 billion in overdue payments, Illinois has proposed a precarious plan to sell its delinquent bills to Wall Street investors in exchange for cash, calculating that the interest it must pay the investors will be less than the late fees it owes.

It is no way to run the nation's fifth largest state, and it is not even clear that investors will agree, but these kinds of shaky deals are likely to become increasingly common as the states try to cope with the greatest fiscal drought since the Great Depression. Starved for revenue and accustomed to decades of overspending, many states have been overwhelmed. They are facing shortfalls of $140 billion next year. Even before the downturn, states jeopardized their futures by accumulating trillions in debt that they swept into some far-off future.

But that future is not so distant, and the crushing debt has made recovery far more difficult to achieve. As The Times reported, Illinois, California and several other states are at increasing risk of being the first states to default since the 1930s. The city of Prichard, Ala., has stopped sending out its pension checks, breaking state law and shocking its employees.

Eventually, the buck will stop in Washington. As George Will points out, giving int to pressure from these spendthrift states will only lead to further catastrophe:

States' troubles are becoming bigger. Hitherto, local governments have acquired infusions of funds from federal budget earmarks, which are now forbidden. Furthermore, states are suffering "ARRA hangover" - withdrawal from the American Recovery and Reinvestment Act, a.k.a. the 2009 stimulus. With about $150 billion for state and local governments, it raised the federal portion of state budgets from about a quarter to a third. Also, in 2009 and 2010, states and localities borrowed almost $200 billion through the ARRA's Build America Bonds program, under which Washington pays 35 percent of the interest costs. Republicans, in another victory over the president in negotiations on extending the Bush tax rates, extinguished that program, which they say primarily produced more public-sector employees.

There are legal provisions for municipalities to declare bankruptcy. Some have done so. As many as 200 are expected to default on debt next year. There are, however, no bankruptcy provisions for states. Some who favor providing such provisions say states are "too big to fail," and under bankruptcy, judges could rewrite union contracts or give states powers to do so, thereby reducing existing pension obligations. Unfortunately, government-administered bankruptcy of governments might be even more unseemly than Washington's political twisting of the bankruptcy process on behalf of General Motors and Chrysler, including the use of TARP funds supposedly restricted for "financial institutions."

Oliver Twist did not choose his fate. California, New York and Illinois - three states whose conditions are especially parlous - did. And in November, each of these deep-blue states elected Democratic governors beholden to public employee unions.

"Too big to fail?" Where have we heard that before?

State governments have nearly doubled the number of employees over the last decade. They thought the good times would roll on forever, and now the piper must be paid and the coffers are empty. Making promises in the name of the people you can't possibly keep is dishonest, so if pensions are reworked in order to restore some fiscal sanity to state governments, it should be done fairly but with the thought that it is taxpayers who are on the hook for this malfeasance and adjustments should be made with them in mind.

Holding taxpayers hostage to the government unions is wrong and Congress should make sure that never happens.