Ill. Treasurer: 'Testosterone' Needed to Solve States' Fiscal Woes

March 24, 2011
BY MICHAEL CORKERY
Wall Street Journal

Illinois Treasurer Dan Rutherford has a solution to fiscal problems facing state and local governments.

"Someone has to go out and have the testosterone and deal with the problems, particularly with the public employee unions," the state's Republican treasurer said in a forum this week at Cardozo Law School of Yeshiva University in New York.

Testosterone, said Mr. Rutherford, is better than the alternative: allowing states to seek bankruptcy protection so a judge can sort out fiscal problem such as pensions.

The forum, at Cardozo's Heyman Center on Corporate Governance, brought Mr. Rutherford together with a restructuring lawyer, a Wall Street banker, the California comptroller and a New York state deputy controller to discuss the feasibility of state bankruptcy, an issue still simmering in the $2.9 trillion municipal-debt market.

"There is not one state official in this nation including Republicans like Dan Rutherford in the state of Illinois that wants to allow bankruptcy," said Mr. Rutherford, referring to himself in the third person.

The treasurer, an elected official, is described on his office's website as the "state's banker. He is responsible for the safekeeping of taxpayers money," including up to $14 billion in state revenue that the treasurer invests before the state uses it to pay the bills. Mr. Rutherford was elected in November 2010.

While saying that, "I happen to be treasurer of one of the most bankrupt states in all of America," Mr. Rutherford said he was breaking with congressional Republicans who have supported the state bankruptcy idea.

"I think what is driving this boat … that we have some Republican juice in D.C. and they don't want to have … to bail this whole thing out."

Illinois has been grappling with one of the nation's largest deficits as a percentage of its budget. Its pension system is the most underfunded of any state.

The state has scaled back pension benefits for newly hired workers and there is growing momentum in the state legislature to reduce benefits for current workers.

Mr. Rutherford, a former state lawmaker, said that the state had a "moral" obligation to honor pension promises that workers have already earned, but he suggested that some benefits could be scaled back going forward.

He predicted that the pension funding problem persisted, it eventually would be settled by a "federal judge" who would force the state to raise taxes in order to make its payment to pensioners.

Panelist Jon Henes, a lawyer at Kirkland & Ellis LLP who has written frequently about how bankruptcy could help states in fiscal distress, said it was unlikely that a federal judge would have jurisdiction over an Illinois state pension issue.

"If we don't start doing something now, it will be the people who succeed you who will be stuck with a bigger problem," Mr. Henes said.

Another idea discussed by the panel was whether some sort of arbitration panel should be created to help mediate disputes between unions and state officials over proposed changes to pension plans. The rules for the arbitration could be set by the federal government.

"Keep the doggone federal government out of the mess," Mr. Rutherford said.

One of the panelists then pointed out to Mr. Rutherford that states such as Illinois have no problem accepting federal funding for various programs.

"I don't disagree with you," Mr. Rutherford said. "Send it back."