Too Big to Fail and Too Big to Pay: States, Their Public-Pension Bills, and the Constitution

Source: Debra Brubaker Burns, Hastings Constitutional Law Quarterly, Fall 2011
(subscription required)

Faced with the most severe budget crises since the Great Depression, many state officials and lawmakers within the United States are desperately trying to pay their bills and balance their budgets. More than a few economists, reporters, academicians, lawyers, and politicians are arguing about legal solutions for pension liabilities that are too big to pay, including possible federal bailouts for states that are deemed “too big to fail.”

States choosing to default on or repudiate any public-pension obligation would face significant legal challenges to any action that impaired those pensions. Beyond the protections of the Constitution’s Contract Clause, state constitutional and statutory laws often provide additional legal protections against unilateral reduction of pension benefits.

This note analyzes two proposed solutions to the states’ expanding pension liabilities. The first is tax-exempt and conditional pension obligation bonds. The second is a newly instituted bankruptcy code for states. Because courts have recognized Congress’s broad discretion in its spending, conditional debt obligations for state pensions would likely survive a constitutional challenge. Bankruptcy for states, however, would face many more legal, practical, and political challenges. Arguably the Bankruptcy Clause of the Constitution is worded broadly enough to allow voluntary bankruptcy for states, and would preempt contradictory state law under the Supremacy Clause. Yet, even if Congress were to establish a new chapter of bankruptcy for states and the Supreme Court found it constitutional, states may in the end determine that on a practical level declaring bankruptcy creates more social, political, and other economic problems than it solves.

Leave a Reply