Let States Declare Bankruptcy

Facing huge budget difficulties, New Jersey Gov. Chris Christie has been showing other states how to survive — namely, by taking on the government-employee unions.

Christie's battles with the teachers unions over the past year have produced countless YouTube hits. And last month, he got a law passed to limit wage hikes — from labor arbitrations between the state and public-employee unions — to a 2 percent average annual increase.

As New Jersey, New York, California, and Illinois — the four states with the highest insurance premiums on their bonds — face life without a compliant Congress to approve their pleas for more cash, they'll increasingly have to follow Christie's example and rein in their unions.

As Margaret Thatcher famously said, the problem with socialism is that sooner or later "you run out of other people's money."

When the states come calling, the House must emphatically say no. More, it's time to amend the federal bankruptcy laws to create a procedure for state bankruptcies — allowing states to abrogate their municipal-union contracts from the school-board level on up.

States, in bankruptcy court, should be able to reorganize their finances so as to put themselves back on a stable footing.

Initially, municipal-bond buyers will protest the lack of federal assistance and may even deny states and localities access to the bond market at any interest rate. But once the states reorganize, they should be able to proceed normally, just as New York City did after its financial meltdown in the 1970s.

Such reorganizations needn't require any ongoing federal involvement. The procedure would let the states help themselves, giving governors and legislatures a third way out of their financial mess. Raise taxes, cut spending or . . . alter union contracts. Each state would face the choice of whether to wallow in overspending or take steps to correct it.

Initially, Democrats will oppose the idea of state bankruptcies. But when House Republicans make clear that no more aid will be forthcoming and that the stimulus spigot is turned off, at least some Democrats will realize this is their best option.

Then, fiscal necessity will have achieved what so many of us want — a return of true local government.

No more will schools be run for the teachers and by the teachers — nor will such unions as the Service Employees International Union and the American Federation of State, County and Municipal Employees dominate state legislatures. School choice, charter schools, and even voucher programs will have a chance to flourish.

Some fear the U.S. Constitution prevents federal law from extending Chapter 9 to permit state bankruptcies because it would violate state sovereignty. Yet Chapter 9 is voluntary, so states would remain sovereign, with merely the option of subjecting themselves to Chapter 9 constraints.

Giving insolvent states the power to break their union contracts would alter dramatically the balance of political power all across the nation. No longer would municipal unions have the financial ability to underwrite the Democratic Party.

Gone from our politics would be $200 million that the American Federation of Teachers, the National Education Association, SEIU and AFSCME together spent on political action in the last election cycle.

Government would be returned to the people.