Newt Gingrich Proposal Notwithstanding, Changes to Federal Bankruptcy Code Unlikely to Occur
Instead, Look for Cash-Strapped States to Get Aggressive and Creative in Tackling Pension Reform
Former House Speaker and possible GOP presidential candidate Newt Gingrich made news last week when he advocated that cash-strapped states be permitted to file for bankruptcy as a way of renegotiating runaway pension and benefit commitments to state workers. His ideas are currently being explored on Capitol Hill.
How likely is that scenario to play out? Not very, says Robert S. Hertzberg, an attorney with Pepper Hamilton LLP.
"In order for a state to be permitted to file for bankruptcy, there would need to be a change made to the U.S. Bankruptcy Code," says Hertzberg. "Those changes would need to be made at the federal level. Such changes are possible, but seem unlikely.
"In addition, the U.S. Constitution protects the contracts that cover state workers' pension benefits. The legal barriers, combined with the unpleasant prospect of confronting unions, will result in little appetite to pursue Mr. Gingrich's novel idea."
Instead, Hertzberg predicts, states will pursue other steps to seek relief from skyrocketing pension plan and healthcare agreements. Pension reform will lead the list. Among his predictions:
- Roll back recent increases – In New Jersey, for example,Gov. Christie has proposed a rollback of the 8 or 9 percent of increases approved for pension plans.
- Raise the retirement age to 65, except permit persons with 30 years of service to retire early.
- Increase the contribution by state workers to their pension plans. – Currently, employees contribute approximately 3 to 8.5 percent. The proposal will make the contribution a uniform 8.5 percent.
- Increase the contribution by state workers to their health insurance plans – Look for states to raise the individual contribution by state workers out of the single digit. States have a good case here, as federal employees now contribute nearly 30 percent of their health insurance premiums.
- Change how pension payments are calculated – New Jersey, as an example, calculates pension payments based on the highest wages earned in a worker's career, rather than a blend of salaries over an extended time.
- Pressure state lawmakers to drink their own Kool-Aid – Look for increased pressure on state legislators who hold multiple public jobs, enabling them to tap multiple pension plans.
- Using the public to exert pressure – With unemployment remaining high, there will not be a lot of patience or sympathy among voters for public employees who appear to have a sweet deal. Reducing Union benefits is not an attack on the middle class as claimed by the Unions. In fact, it is just the opposite. The benefits offered to public employees are straining local budgets causing an attack on middle class homeowners who are struggling to pay their real estate taxes.
Hertzberg also predicts that more municipalities across the nation will file for bankruptcy. Unlike states, municipalities in most of the states are permitted to reorganize through bankruptcy.
"Bankruptcy should always be considered a last resort," Hertzberg says. "But because it allows a government entity the opportunity to negotiate with creditors to reduce its debt, expect it to receive serious consideration by many struggling municipalities in 2011."
EDITOR'S NOTE: Mr. Hertzberg can be reached for comment this weekend on his cell phone: 248-842-0270.
About Pepper Hamilton
Pepper Hamilton LLP (www.pepperlaw.com) is a multi-practice law firm with more than 500 lawyers nationally. The firm provides corporate, litigation and regulatory legal services to leading businesses, governmental entities, nonprofit organizations and individuals throughout the nation and the world. The firm was founded in 1890.
Contacts:
Buchanan PR
Blair Kahora Cardinal
610-649-9292 (o)
908-246-2268
(c)
blair@buchananpr.com