Failing states, then and now

In the old days, when a government failed and could no longer sustain itself, the state was eventually conquered. In modern times, conquering is not an option. Failed states become the walking dead, and they walk to bankruptcy court. This is just one of the thoughts inspired today by Steve Malanga’s excellent RCM essay:

One of Illinois’ greatest problems, for instance, is that it has not been able to afford its pension system for years. Rather than reform it by reducing its costs, however, Illinois has borrowed money to finance the system. But Illinois is hardly alone. These kinds of pension borrowing have become common throughout state and local finance despite general agreement that they are risky and often accomplish little except to kick the funding problem down the road.

In the last 25 years states and cities have issued more than 3,000 pension bonds, racking up some $60 billion in obligations. Most worrisome, perhaps, is that the practice of funding pensions through debt grew more common after the fiscal meltdown of 2008. In the wake of those woes, pension borrowings increased from about $1.6 billion in 2009 to $3.8 in 2010 to $5.2 billion last year.

… School districts around the country, for instance, have taken to funding their building and repair projects by issuing what’s known as capital appreciation bonds which don’t require any repayments for 20 years, but are extremely expensive to pay off over their 40-year life. One school district in California, Poway, borrowed $105 million to finish a construction project but didn’t want any new debt payments on its balance sheet in the immediate future so it issued these CABs. Final tab to repay the debt over 40 years: $1 billion.

… One of the principal differences between bankruptcy in the private and public sectors is that governments that become insolvent don’t get liquidated. But in Michigan, some state legislators are now proposing that perhaps it’s time to disband municipal Detroit government and break the city up into a series of smaller communities that might better govern themselves.

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