So far, this blog has been focusing on governments’ assistance to citizens and companies. Yet, another key dimension of the COVID-19 economic crisis is the intergovernmental dimension—how are national/federal levels supporting states and local levels of government? I will be discussing this dimension in this post, as well as in later ones. --------------------------------------------------------------------------------- Last week Senate Majority Leader Mitch McConnell (R-KY) noted that states that have been hit hard by the Coronavirus should not expect to be bailed out; rather, they should seek bankruptcy protection. This prescription has not only been unpopular among many US governors, but would also require changes in the US bankruptcy code. This entry discusses some basic points about the somewhat obscure Chapter 9 of the US Bankruptcy Code. What should you know? To start with, 49 US states are required to have balanced budgets (Vermont being the exception). Yet, in light of current challenges, complying with the balanced budget rule has proven to be especially challenging. Second, states in the US are not allowed to file for bankruptcy. Therefore, in order for state bankruptcy to become a reality, both federal chambers must pass legislation to authorize this course of action. For instance, Illinois (a state facing major fiscal pressures) is currently asking for a federal bailout in part because states are not allowed to file for bankruptcy. The case of Puerto Rico is somewhat unique as a special process (see PROMESA Law) to restructure the island's debt was approved by Congress and included the creation of a Financial Oversight Board ("la junta"). When it comes to governmental units, since 1946, only municipalities (e.g., cities, towns, villages, towns) can file for bankruptcy (see, for example the cases of Detroit and Orange County). In contrast to Chapter 11 which gives protection to corporations, Chapter 9 was specifically designed for municipalities in the context of the Great Depression. This process “allows local governments to continue public service provision while working with all creditors simultaneously to negotiate a debt adjustment plan” (Yang and Yulianti 2019: 5). Even if bankruptcy law is one of the few instances in which the federal level is involved in local finances, states still have to approve a localities’ request to file for bankruptcy. Still, there are variations across states-- as of 2016, twenty-one states do not allow local governments to file for bankruptcy, and the remaining states place restrictions on localities (Pew Charitable Trusts 2016). In addition, the municipality has to demonstrate that: a) it is insolvent (does not have enough money to pay creditors and serve constituents), and b) that it has negotiated with creditors in “good faith.” Yet, bankruptcy is a rare and extreme course of action, even if there was an increase in the frequency of bond defaults and bankruptcy during the Great Recession. From 1965 until 2015, only 63 cities, towns, or counties sought Chapter 9 protection; and on average, there were 1.3 defaults per year between 1970 and 2007, and 5 defaults per year between 2008-2014 (Spiotto, Acker, and Appleby 2016: 28) (also see Yang and Abbas 2019). Beyond bankruptcy, how do localities face financial emergencies? The next post will discuss this issue.
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To tackle the COVID-19 economic crisis, countries around the world have widely adopted (or adapted) cash assistance programs, such as the “US stimulus checks” (see my previous post). Besides traditional fiscal and monetary solutions, we should also consider “non-traditional” labor market policies such as kurzarbeit (short-time work). Kurzarbeit is often used to explain Germany’s exceptional labor market performance during the Great Recession. For instance, from 2009 to 2011, unemployment rates in Germany decreased (2009: 7.7%; 2010: 6.9%; 2011: 5.9%). By contrast, the United States followed the opposite trend (for instance, the unemployment rate in 2011 was 8.9%). What is kurzarbeit? Kurzarbeit, or a reduction of working hours, allows firms to retain workers without having to pay them a full salary. According to the German Ministry for Labor and Social Affairs, Kurzarbeitergeld (short-time allowance) “pays the short-time allowance as partial compensation for a loss of earnings caused by a temporary cut in working hours. This reduces the costs faced by employers in the context of employing workers, and enables companies to continue to employ their workforce even in the event of a loss of orders. In other words, the short-time allowance helps to prevent job losses.” This labor market policy is grounded in Germany’s strong model of social partnership (see Danish entry) in that employers and labor unions (or the affected workers) reach an agreement to reduce working hours and pay. Consequently, the government subsidizes the worker’s lost income. The agreement must be first approved by the firm’s Work Council (an organization representing workers at the firm level) and must be in line with German labor law. If the reader is unfamiliar with these terms and dynamics, I recommend this source. With the COVID-19 crisis, the government has relaxed the conditions for accessing Kurzarbeitergeld. Consequently, many German companies, including Volkswagen, have increasingly taken advantage of this mechanism “Almost 650,000 businesses had applied for Germany's reduced-hours work scheme by April 6th[…] with the government expecting uptake to exceed levels seen in the 2008-2009 financial crisis.” In this process, Kurzarbeit has (once again) gaining much notoriety around the world. “The European Commission is using the German program as a model for a regional effort to encourage that workers are furloughed, not sacked.” It is important to clarify that: 1) this policy has been in place for decades in Germany, and 2) is not unique to this country (for instance, see the post on Spain’s ERTEs). Still, as I discussed in a previous entry, the current crisis could result in policy innovation (in the case of Germany, we can also refer to the staff-sharing deal between Aldi and McDonald) and the diffusion of policy solutions across borders. |
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Mariely Lopez-Santana is a Political Scientist and an Associate Prof. at the Schar School of Policy and Government at George Mason University. In the last two decades she has spent much time studying, teaching, and writing about employment policy. She is working on a book project on state intervention and municipal distress. Categories
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