Provide assistance, but require states to pay off their unfunded liabilities.
NRPLUS MEMBER ARTICLE
hen Congress was deliberating about a massive coronavirus stimulus package in late March, the Democrats decided that they wanted to attach some strings to the money they were handing out. For example, Senator Chuck Schumer (D., N.Y.) fought for a provision prohibiting share buybacks by any company that took a stimulus loan — including for a period of time after the loan had been repaid.
Share buybacks are an especial hate object for Democrats. They shouldn’t be. The big stink on corporate management in the United States is the agent-principal problem — corporate executives are supposed to be looking after the interest of shareholders, but the executives’ own interests and those of the shareholders are not precisely aligned. One of the things that management can do for shareholders is give them what it is that got them into investing in the first place: money. Dividends are one way to pay shareholders, and share buybacks are another. Buybacks are not always the right thing to do — to everything there is a season — but there isn’t anything inherently objectionable about them. Like derivatives and business tax deductions, share buybacks are most energetically denounced by the people who least understand what they are and how they work.
But, for Democrats, the string’s the thing. Elizabeth Warren’s proposal to partly nationalize all major American businesses by having the federal government dictate to them the composition of their boards, compensation practices, etc., is not designed to make life better for median-wage line workers. Giving politicians a whip hand over multi-billion-dollar enterprises is its own reward. And it leads to other rewards: There is a reason why the ladies and gentlemen at finance-connected law firms such as Brown Rudnick and Berger & Montague open up their wallets for Senator Warren. The power to dictate the terms of business is the power to destroy a business — or an industry.
Republicans have an interest in the finer points of string-attachment right at the moment. The Democrats are pushing for another multi-trillion-dollar bailout bill, this one aimed at state and local governments and almost certain to disproportionately benefit Democrat-run states and cities that have been less than entirely sober in the management of their fiscal affairs. Republicans are not of one mind in this: Senator Mitt Romney, among others, has emphasized that it is not only Democratic states that are in trouble but some Republicans ones, too, Kansas and Kentucky among them. Other Republicans, such as Florida’s governor Ron DeSantis, argue that the coronavirus emergency shouldn’t be used as political cover to bail out states that were basket cases long before the plague from Wuhan reached Albany, Sacramento, and Springfield.
Senate Majority Leader Mitch McConnell (R., Ky.), the guy who actually runs things in Washington, has been uneven in his public statements on this. He has at times suggested a very destructive course of action — rewriting U.S. bankruptcy law to extend bankruptcy protections and processes to the states, which would upend centuries of bankruptcy law and turn the Constitution on its head by putting federal judges or other federal overseers in charge of states’ finances. Senator McConnell also has suggested that other courses of action might be preferred.
Most of this could be solved in a relatively straightforward way by putting the right strings on the aid.
The main issue here is the unfunded liabilities of the state and local pension systems, particularly in Democrat-run jurisdictions such as the state of Illinois and the city of Dallas. What happens is this: Government employees are a powerful political constituency, and they want what all such powerful political constituencies want: more. But corporate executives are not alone in suffering from the agent-principal problem, and in the states and cities the leaders are for the most part political cowards who, unlike the bigs in Washington, cannot borrow money for ordinary operating expenses such as payroll; and so rather than satisfying their constituents’ demands with higher salaries, they offer them more generous pensions and benefits in retirement — and then, in 99 cases out of 100, decline to set aside the money necessary to pay for those promises. The difference between what a pension system has invested and what it needs to make good on its promises is its “unfunded liability,” and in states such as Illinois these liabilities can run into the hundreds of billions of dollars. For Illinois to make up the difference between what it has promised and what it has funded would require it to spend 100 percent of its tax revenues for about seven years on nothing else — and that was before revenues nosedived thanks to the lockdown.
There is a good case for providing some short-term aid to states and cities whose revenue streams are currently smoking ruins in the wake of a global crisis over which they had no control. But that is not the question. The question is whether Washington should bail them out of troubles that are only tangentially related to the epidemic. The answer to that is, No.
It would be entirely appropriate to encumber aid in such a way as to prevent its being used for any other than a relatively narrow range of specified purposes. But, because money is fungible, that sort of legislative guardrail might not be enough. A better approach would be to condition aid on distressed states’ and cities’ actually addressing their unfunded liabilities, which are the root of the problem here. To that end, Congress could require that states adopt reasonably responsible pension practices in order to participate in ongoing assistance programs; “reasonably responsible” here would mean renegotiating programs with beneficiaries in order to begin to align the promises that have been made with the resources needed to make good on them and seeing to it that states start making actuarially required contributions to pension plans going forward. Of course that assumes a level of credibility and discipline not obviously in evidence in Washington (or in Austin, or in Frankfort, or in Olympia), but so does every alternative.
Mitch McConnell could get some juice from being Senator No. In this case, he might be better off a Senator Yes, But.
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