If you've been reading Calitics for any length of time, you know that one of the things we often point out is that California cannot go bankrupt. Our constitution mandates bondholders be repaid before any other expenditure aside from K-12 schools. And a federal law passed in 1937 to stop Arkansas from going bankrupt ensures that while city and county governments (like Vallejo and Orange County) can declare bankruptcy, states cannot.
Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011....
Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations. Republican Representatives Devin Nunes and Darrell Issa of California and Paul Ryan of Wisconsin have introduced a bill that would require state and local governments to estimate the size of public pension liabilities if their assets earned a more conservative rate of return than many plans currently expect. Failure to do so would result in the suspension of their ability to issue tax-exempt bonds.
Reuters cites a Weekly Standard article that laid out the endgame - by changing the law to allow state bankruptcies, and then forcing states to go bankrupt by cutting their funding and undermining their ability to borrow, states would be able to reopen contracts with public employees. Not only could wages and benefits then be cut for current workers, but pension benefits for retired workers would also become fair game for cuts, as has happened with retired auto workers and others whose private sector pensions have been slashed after corporate bankruptcies.
It's no surprise that California Republicans like Issa and Nunes are leading this fight - they know that public employee benefits are one of the last vestiges of a middle-class workforce in the state, and that those unions are one of the last lines of defense against the right.
California already has one big battle come up in early 2011 over the state budget. Looks like we'll have another in 2011 with this federal effort to force us into bankruptcy. And with Barack Obama busy caving to the right whenever possible, we'll have to win this fight on our own.