GREGOIRE & HEINEMAN: State bankruptcy is not the answer

OPINION:

Bankruptcy for states is not an option today, nor should it be an option in the future. It is not something governors have asked for and is not one we would use. The mere existence of a law allowing states to declare bankruptcy would only serve to increase interest rates, raise the cost of state government and create more volatility in financial markets.

First, let us set the record straight: States - unlike the federal government - must balance their budgets. When revenues decline, states must dip into rainy-day funds, cut spending or increase revenue. This is a duty governors have fulfilled throughout this recession and will continue to fulfill in the years ahead. These are difficult times in which to govern, but the challenges also provide us with opportunities.

The fact is that states rose to the challenge of the 2008-09 recession by cutting spending by more than 10.7 percent ($75 billion), tapping rainy-day funds, reducing the size of state government and streamlining state services. We have remained fiscally responsible and balanced our budgets. More cuts will be necessary, but by making tough choices today, we lay the foundation for stronger and more efficient state government tomorrow.

Second, states are not at risk of “going under” because of current debt burdens or future expenses related to pensions. Nationally, interest payments on state and local bonds amount to less than 4 percent of total spending - the same amount as in the 1970s. Moreover, similar to the private sector, most states only sell bonds for capital projects, such as roads and schools, not to fund day-to-day operations.

Third, as related to pensions, states are actively restoring fund balances diminished by the recession and changing their plans to reduce future costs. Between 2005 and 2010, 30 states made pension changes. In 2010, pension actions accelerated, with at least 20 states making further changes. Several states also are moving from defined benefit plans to defined contribution plans or hybrids. States fully expect that these actions - which include major changes to public plans - will allow them to meet future obligations.

The reported bankruptcy proposals suggest that a bankruptcy court is better able to overcome political differences, restore fiscal stability and manage the finances of a state. Those assertions are false and serve only to threaten the fabric of state and local finance.

Governors and states have clear track records of being able to successfully manage state finances - even in the face of severe financial stress - and they will continue to do so. Bankruptcy is not the answer. Instead, we must work with our federal partners to improve fiscal stability and produce cost savings for government at all levels. This type of cooperation - not state declarations of bankruptcy - is what we need to put our nation on the path to economic recovery.

Chris Gregoire is the Democratic governor of Washington state and chairman of the National Governors Association. Dave Heineman is the Republican governor of Nebraska and vice chairman of the National Governors Association.