By STEVEN MALANGA

Mr. Malanga is a senior fellow at the Manhattan Institute. This column is adapted from a forthcoming issue of City Journal, where he is a senior editor.

EXCERPT FROM THIS ARTICLE:  A December report by the States Project, a joint venture of Harvard’s Institute of Politics and the University of Pennsylvania’s Fels Institute of Government, estimated that state and local governments now owe in sum a staggering $7.3 trillion. Incredibly, the vast majority of this debt has never been approved by taxpayers, who are often unaware of the extent of their obligations.

Most state constitutions and many municipal charters limit borrowing and mandate voter approval. No matter. Politicians evade the limits, issuing billions of dollars in municipal offerings never approved by voters, sometimes with disastrous consequences. Courts have rubber-stamped many of these schemes.

Earlier this month, the Securities and Exchange Commission charged Illinois officials with making misleading statements to bond investors about the state’s pension system. The agency detailed a long list of deceptive practices including failure to tell investors that the system was so underfunded that it risked bankruptcy.

Illinois taxpayers, as well as the holders of its debt, will ultimately bear the burden of the officials’ misdeeds. But there is nothing unique about the Prairie State. For years, elected officials in states and municipalities across the country have been imprudently piling up obligations that are imposing serious strains on budgets, prompting higher taxes and cutbacks in services.

In January, city officials in Sacramento, California’s capital, reported the results of a study they had commissioned on all the debt that the municipality had incurred. At a City Council meeting that the Sacramento Bee reported as “sobering,” the city manager explained that Sacramento had racked up some $2 billion in obligations (mostly pensions and retiree health care). All this for a municipality of 477,000 residents with an annual general fund budget of just $366 million.

Sacramento finances are already stretched—the city has cut some 1,200 workers, or 20% of its workforce, in the past several years. Servicing its debt in years to come will only add more woe, especially given the intractability of public unions. The budget report noted that “While reducing staff is clearly not the preferred method for reducing costs, the city has a very limited ability to reduce the cost of labor absent cooperation from the city’s employee groups.”

According to studies by the Pew Center on the States, states and the biggest cities have made nearly three-quarters of a trillion dollars in promises to pay for retiree health-care insurance. Yet governments have set aside only about 5% of the money they’ll need to pay for these promises. (more…)

By JAMES SHERK
AND TODD ZYWICKIMr. Sherk is a senior policy analyst in labor economics at the Heritage Foundation. Mr. Zywicki is a law professor at George Mason University and a senior scholar at the university’s Mercatus Center. This op-ed is adapted from a longer article published this week at Heritage.org.

President Obama touts the bailout of General Motors and Chrysler as one of the signature successes of his administration. He argues that the estimated $23 billion the taxpayers lost was worth paying to avoid massive job losses. However, our research finds that the president could have both kept the auto makers running and avoided losing money.

The preferential treatment given to the United Auto Workers accounts for the American taxpayers’ entire losses from the bailout. Had the UAW received normal treatment in standard bankruptcy proceedings, the Treasury would have recouped its entire investment. Three irregularities in the bankruptcy case resulted in a windfall to the UAW.

First, GM and Chrysler owed billions of dollars to the union’s Voluntary Employee Beneficiary Association (VEBA) when they went bankrupt. The union and the auto makers created VEBA in 2007 to assume responsibility for the UAW’s generous retiree health benefits. The benefits allowed UAW members to retire in their mid-50s with minimal out-of-pocket health-care expenses for the rest of their lives. GM owed $20.6 billion and Chrysler owed $8 billion to VEBA as unsecured claims.

A bedrock principle of bankruptcy law is that creditors with similar claims priority receive equal treatment. If you owe $1,000 each on two credit cards, in bankruptcy you cannot choose to pay $900 to Citi and only $200 to Chase. Each of the creditors is entitled to an equal percentage recovery.

In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.

At the time of bankruptcy, GM owed these unsecured creditors $29.9 billion, for which they received 10% of the stock of “new” GM, which went public in November 2010, and warrants to purchase 15% more at preferred prices. Yet VEBA got 17.5% of new GM and $9 billion in preferred stock and debt obligations. Based on GM’s current stock price, VEBA collected assets worth $17.8 billion—$12.2 billion more than if the administration had treated it like the other unsecured creditors.

The same thing happened at Chrysler, only to a greater degree. Chrysler’s junior creditors recovered none of their $7 billion in claims. In normal bankruptcy proceedings, the UAW would have also collected nothing. Instead it walked away owning almost half of new Chrysler and a $4.6 billion promissory note earning 9% interest. Had the stock and note gone to the Treasury instead, the bailout would have cost taxpayers $9.2 billion less.

Getty ImagesUnited Auto Workers President Bob King (left) with President Barack Obama at a UAW conference in Washington, D.C., Feb. 28. (more…)

What happened in Wisconsin signals a shift in political mood and assumption. Public employee unions were beaten back and defeated in a state with a long progressive tradition. The unions and their allies put everything they had into “one of their most aggressive grass-roots campaigns ever,” as the Washington Post’s Peter Whoriskey and Dan Balz reported in a day-after piece. Fifty thousand volunteers made phone calls and knocked on 1.4 million doors to get out the vote against Gov. Scott Walker. Mr. Walker’s supporters, less deeply organized on the ground, had a considerable advantage in money.

But organization and money aren’t the headline. The shift in mood and assumption is. The vote was a blow to the power and prestige not only of the unions but of the blue-state budgetary model, which for two generations has been: Public-employee unions with their manpower, money and clout, get what they want. If you move against them, you will be crushed. 

Mr. Walker was not crushed. He was buoyed, winning by a solid seven points in a high-turnout race.

Governors and local leaders will now have help in controlling budgets. Down the road there will be fewer contracts in which you work for, say, 23 years for a city, then retire with full salary and free health care for the rest of your life—paid for by taxpayers who cannot afford such plans for themselves, and who sometimes have no pension at all. The big meaning of Wisconsin is that a public injustice is in the process of being righted because a public mood is changing.

Political professionals now lay down lines even before a story happens. They used to wait to do the honest, desperate, last-minute spin of yesteryear. Now it’s strategized in advance, which makes things tidier but less raggedly fun. The line laid down by the Democrats weeks before the vote was that it’s all about money: The Walker forces outspent the unions so they won, end of story.

Money is important, as all but children know. But the line wasn’t very flattering to Wisconsin’s voters, implying that they were automatons drooling in front of the TV waiting to be told who to back. It was also demonstrably incorrect. Most voters, according to surveys, had made up their minds well before the heavy spending of the closing weeks.

Mr. Walker didn’t win because of his charm—he’s not charming. It wasn’t because he is compelling on the campaign trail—he’s not, especially. Even his victory speech on that epic night was, except for its opening sentence—”First of all, I want to thank God for his abundant grace,” which, amazingly enough, seemed to be wholly sincere—meandering, unable to name and put forward what had really happened.

But on the big question—getting control of the budget by taking actions resisted by public unions—he was essentially right, and he won.

Associated PressWisconsin Gov. Scott Walker. (more…)