Oklahoma is facing a $600 million budget shortfall this year, and lawmakers are being asked to trim fat wherever possible.
Often, when a business or an individual runs into serious financial trouble, bankruptcy is a consideration. But since states are considered sovereign under the U.S. Constitution, they are prevented from receiving federal bankruptcy protection.
In late January, Newt Gingrich – the former speaker of the House of Representatives, who remains a powerful figure among Republicans – announced legislation allowing states to declare bankruptcy would likely be introduced in Congress within the next month.
In an interview with Reuters, Gingrich said if passed, the law would help states handle long-term budget problems.
Many states, including Oklahoma, have been recipients of funds through the $814 billion economic stimulus plan passed in 2009. But lawmakers fear Congress may be asked to step in again to aid foundering states that have yet to recover from the recession; hence the attractiveness of bankruptcy.
One of the largest problems Oklahoma faces is funding the state’s pension system, which – according to a recent report by the Associated Press – is an unfunded liability of $16 million.
Filing for bankruptcy would allow the state to renege on its pension promises and other obligations to state employees. According to Howard Cure, director of municipal research at Evercore Wealth Management in New York, under bankruptcy, an employer can negate labor contract provisions, and state bankruptcy may provide the state an avenue with which to apply pressure to public employee service unions to negotiate.
In her State of the State address Monday, Gov. Mary Fallin asked lawmakers to overhaul the state’s pension system, along with trimming $68.5 million from public education, $30.1 million from higher education, and $12 million from the Department of Corrections.
State Sen. Jim Wilson, D-Tahlequah, said Gingrich and others watched large corporations break pension agreements during the 2008 financial crisis, and are trying to follow suit.
“These guys sure get excited,” said Wilson. “They see corporations like GM breaking pension funds and they decide they can do it, too. They hate government employees, state employees, when all the time they could pay for pension shortages. [Retireees] aren’t getting wealthy from pension funds.”
Wilson said proponents of the measure think they’re going to divert pensions to stock, but it’s implausible.
“We fixed [pensions] more than once, by putting $575 million a year into it, and unfortunately that doesn’t seem to be enough because of the downturn in the stocks,” he said. “It’s teacher retirement that’s a problem, because of the number of people in the system. It can be good again; I’m not concerned about it. They say we need to be 80 percent funded to be solid, and we’re inching our way there. It may take 40 years to get there, but we can do it. It comes down to whether they want to beat people out of their pensions.”
Linda Hampton, vice president of the Oklahoma Education Association, said teachers have been provided retirement through a vote of the people.
“Oklahomans voted to establish the Teacher Retirement System through a constitutional amendment,” said Hampton. “We believe filing bankruptcy would not relieve the state of its obligation. Oklahomans have a great deal of pride, and trying to get out of a responsibility in this manner would not be acceptable to them.”
Wilson said the current state administration and leadership don’t want to raise taxes on the rich.
“They don’t want to spend any money,” said Wilson. “They want to use it for tax cuts for rich people, not poor people. It kills them to think we might have to spend some of that money. What they see is the liability, and they know they’ll have to raise taxes. The six or eight wealthiest people in the state don’t want to pay for it. If we buy into this bankruptcy thing we’ll just be devastated.”
State Rep. Mike Brown, D-Tahlequah, agrees with Wilson.
“If states find a way to do this, it will be a nightmare,” said Brown. “For a state to get out of its pension obligations is wrong.”
Brown said he has no doubt the state pension system has been abused, and that some retired legislators have tripled their benefits, but declaring bankruptcy is not the way to solve the problem.
“I would hope this is just a scare tactic by Gingrich to bust the larger bargaining groups, which is a possibility,” said Brown.
“I think we need to step forward and possibly look at those on pensions and maybe move to a 401(k) system for new people and find a way to grandfather in those already in the system. But there’s no need to wreck everyone’s pension plan to gain more power.”
Brown said larger states oppose the bankruptcy issue for the same reasons large corporations avoid it whenever possible.
“It’s harder for larger entities, because of the cost of restructuring,” said Brown. “It’s an easier mindset for a small state to say we’ll walk away from our debt and in 10 years be held harmless, but it would have a domino effect across the country. It would just be a total nightmare.”
Jim Cheek, employee for the Crowne Plaza Hotel in Tulsa and formerly a Muskogee resident, is completely opposed to the idea that states have a bankruptcy option.
“The states, cities, counties and the federal government need to learn to live like everyone else,” said Cheek. “You only spend what you can afford, no more!”
Tahlequah resident Tonya Sappington thinks the suggestion is ludicrous.
“I would say the federal government has us right where they want us,” said Sappington. “Thinking the U.S. is broke and cannot help. Hey, I have an idea. How about giving them all a raise for their good work.”