Statement of Judiciary Committee Chairman Lamar Smith Hearing on "The Role of Public Employee Pensions in Contributing to State Insolvency and the Possibility of a State Bankruptcy Chapter"

Statement of Judiciary Committee Chairman Lamar Smith
Hearing on “The Role of Public Employee Pensions in Contributing to State Insolvency and the Possibility of a State Bankruptcy Chapter”
           
Chairman Smith: A famous tale by Hans Christian Andersen depicts an emperor who cares only about his wardrobe.  His weavers fashion him a garment made from a fine fabric they say is invisible only to those who are unfit to see it.  The emperor cannot see the suit, but he fears being deemed unfit to be king, so he dons his invisible garment and parades around town. 

Finally, a small child calls out from the crowd, “The emperor has no clothes!”

Much like the weavers in this story, many states have promised their public employees the finest pension benefits but have funded their pension obligations with invisible money.  In the private sector, employees generally contribute to their own retirement in IRAs and withdraw their savings later in life. 

In contrast, states, through collective bargaining with unions, have promised fixed payouts to their retired public employees without requiring any employee contribution.  States are therefore on the hook to pay 100% of public employee pensions in addition to other retirement benefits like health insurance. 

Despite the high cost of these pensions, it is not for Congress to admonish states for spending their money as their elected leaders see fit.  States are sovereign in our system of federalism and are free to make even very expensive decisions. 

What is cause for federal concern is that states have so consistently underfunded public employee pensions that cumulatively they face pension deficits of approximately three trillion dollars.  Some fear that states will eventually default. 

Voters in spendthrift states should demand collective sacrifice from public employees.  Someone must say the emperor has no clothes.

Notwithstanding states’ fiscal woes, the era of federal bailouts is over.  Congress should not take money from taxpayers in fiscally healthy states to give to public employee unions in a handful of spendthrift states. 

And while bankruptcy for states may seem like an attractive alternative to state bailouts, there are constitutional and policy concerns with this approach.

First, I am unsure whether Congress has the constitutional authority under Article I to allow a state to seek bankruptcy relief.  States are co-sovereigns in our system of federalism and have authority to tax and spend. 

Even if Congress could enact a state bankruptcy chapter, it is also highly unlikely that any state would ever take advantage of it.  The National Governors Association and the National Conference of State Legislatures have announced that states do not want bankruptcy relief and would not use it. 
States currently have ways to put their fiscal houses in order.  Even the governors of traditionally union-friendly states already have taken steps to reduce state spending and reform their public employee pension systems.

I am also concerned that a state bankruptcy option may actually encourage states to borrow more money, knowing that they could later restructure their debt in bankruptcy.  Future borrowing levels would thus increase even in spendthrift states.   And borrowing would be at higher interest rates for all states because lenders would justifiably charge a price for the risk of state bankruptcy.

Congress should not hinder restructuring efforts at the state level by passing laws that make it more expensive for states to access capital in the bond market during a recession.  And it should not pass laws that unfairly punish prudent states with higher interest rates.

Finally, in a state bankruptcy case it would be difficult to prevent the sort of political favoritism of unions over bondholders seen in the Chrysler and General Motors bankruptcies. Public employee unions have exerted influence over state officials to obtain substantial pension benefits. 

Why should Congress believe that this same political influence will not cause state debtors to protect public employee pensions in bankruptcy?

Still, I remain open to exploring how Congress may play a role in helping states restore fiscal sanity to their budgets.  And I look forward to working with my colleagues in the House to explore alternative federal responses.