Goldwater Institute: Barney Frank's backdoor bailout

by Nick Dranias Unsustainable spending threatens city finances across the country. Filing bankruptcy would allow cities to cut their spending by getting out from underneath unsustainable payroll obligations. That means public employees would likely lose a portion of their retirement and health care benefits. Knowing this, California's firefighter union, California Professional Firefighters, is moving quickly to block cities from filing bankruptcy. If they succeed, cities may default on municipal bonds instead of cutting payroll and other expenses. Ultimately, taxpayers could be forced to foot the bill for yet another bailout--this time for holders and insurers of municipal bonds. But this time, the bailout may not come through the front door. Congressman Barney Frank is advocating a bill that would authorize the federal government to "reinsure" municipal bonds. This bill largely avoids the spectacle of creating a new federal agency to pump stimulus funds into insolvent cities. Instead, the federal government with its full faith and credit would quietly back private insurers of worthless municipal bonds, leaving taxpayers on the hook for billions of dollars in worthless city debt. Like past bailouts, Rep. Frank's backdoor bailout shifts the risk of bad investments from companies like A.I.G. (the second largest holder of municipal bonds) to taxpayers. And like other bailouts, it only makes the situation worse by treating the symptoms and ignoring the cause: unfettered growth and spending by cities and other municipal governments. The only real solution to municipal insolvency is to shrink cities, counties and towns to their core functions as defined by the principles of limited government. A recent Goldwater Institute report, A New Charter for American Cities, shows how it can be done. Nick Dranias holds the Goldwater Institute Clarence J. and Katherine P. Duncan chair for constitutional government and is the director of the Institute's Dorothy D. and Joseph A. Moller Center for Constitutional Government.

Learn more: Goldwater Institute: A New Charter for American Cities: 10 Rights to Restrain Government and Protect Freedom Washington Watch: The Municipal Bond Insurance Enhancement Act of 2009 House of Representatives: Discussion of Municipal Bond Insurance Enhancement Act of 2009 Wall Street Journal: California Cities Face Bankruptcy Curbs Bloomberg: Cities Ask Treasury for $5 Billion to Fund Public Bond Insurer National Bureau of Economic Research: AIG's status as second largest holder of municipal bonds (p 17)