States may be allowed to declare bankruptcy

[DCBob]

From the NY Times..

Path Is Sought for States to Escape Debt Burdens
By MARY WILLIAMS WALSH
Published: January 20, 2011

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign. But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.

Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html?pagewanted=1&_r=2&src=busln

I fear this may be the only way to solve the looming states debt crisis. The problem of course with this is that state workers and retirees are likely to take it on the chin if this goes through.

[rfranklin]

1. That's pretty much the objective...

This is another way to achieve the right wing objectives of starving government.

[HereSince1628]

5. Seems that way. n/t

[NightWatcher]

2. Any/all state pensioners are going to lose their retirement if this happens

What the hell are we going to do when states become insolvent?

[shanti]

35. frightening thought

i'm only 55, but retired from the state last month. i can't even imagine what would happen if i lost my pension. at my age, the prospect of a job is pretty much gone. :(

[Jim__]

3. Given that John Coryn and Newt Gingrich are the main supporters listed in the article ...

my presumption is that this is not the best solution to the problem. I could be convinced; but I'd really like to know what the potential is to resolve this problem through tax increases on the rich rather than cutoffs against the working class.

[DCBob]

10. Yeah, this does appear to be a idea pushed mostly by the right wing..

Although the article did mention some Democrats were interested as well.

[madrchsod]

4. interesting they mentioned illinois...

we raised our personal and corporate taxes. we are the only state in the rust belt that raised taxes and we are the only state who has a democratic lead government.

if we pull ourselves out of the hole there`s going to be a lot of democrats in the rust belt wondering why they did`t vote.

[DCBob]

7. The question is can Illinois actually solve its problems with raised taxes..

Time will tell but from things I have read it looks daunting.

[madrchsod]

11. yup it`s a crap shoot but...

my wife finally got her pay raise after two yrs and the agency she works for finally got paid after close to a year. we ain`t out of the woods but it`s a step in the right direction.

[justiceischeap]

6. But wait... wasn't it the (R)s that were screaming about so many "regular" folk

declaring bankruptcy and not working hard enough to be responsible for their own debts. Isn't that why it's now more difficult for the "average joe" to declare bankruptcy?

[NNN0LHI]

8. Anyone that didn't know this was coming after watching our automakers go bankrupt is a fool

It was the well paid workers in manufacturing who were paying the withheld taxes every week that were funding everything else. Government workers are nice but they don't pay the bills. I tried explaining how this works a few years ago but no one wanted to listen. Now it is about to hit us right in the face.

Don

[madrchsod]

9. the federal government would pick up the tab for public workers pensions

since most public workers do not pay social security the federal government would have to take the accounts from the states. that would create an even larger federal debt...

[jody]

13. How do you believe voters from the 25 smallest states, about 45 million or 15%, will vote

for their senators when asked to spend the money they saved from living within their means, to bail out the largest states who lived as wastrels?

[badtoworse]

15. A good question, but DU struggles at times dealing with fiscal and political reality

The voters you mentioned are going to tell the wastrels to pound sand. I'm interested to read what others think, though.

[badtoworse]

14. Where is that requirement stated? The federal government is broke too.

[Yupster]

32. Why would a Republican congress

take the tab for state worker pensions when these same state workers work their butts off to get those same congresscritters kicked out of office every election cycle?

[WinkyDink]

38. Guess again, re: teachers.

[muriel_volestrangler]

42. Could you expand on "most public workers do not pay social security"?

I don't understand what you mean by that.

[jody]

12. So state governments/employees who mortgaged the future earnings of workers in the private sector

will want to continue living their life style?

While workers in the private sector lose their jobs and join the ranks of the underemployed/unemployed, state employees and state retirees can watch from their estates and muse "let them eat cake".

I caution state employees and state retirees to beware the ballot-box guillotine owned by those who work in the private sector.

Benito Mussolini adopted a passage by another author, "Fascism should more appropriately be called Corporatism because it is a merger of State and corporate power."

Students of Italian Fascism know that Mussolini, once a strident socialist, wanted to combine a corporations and labor with a central government dominated by the military.

It was not just corporations who threatened democracy in Italy, it was fascism/corporatism, a deadly mixture of leaders from the military and corporations and labor.

[eShirl]

17. I'm guessing you don't know very many state employees or state retirees?

[jody]

34. ROFL I know hundreds of employees & retirees from several states and thousands of workers from the

private sector.

[KharmaTrain]

16. Another Booosh Era Shit Sandwich...

State economies have been hit on many fronts over the past decade. The boooosh tax cuts for the rich meant people were also paying less to states that turned many surpluses in the 90s into defecits. Then add the double whammy of the collapse of the real estate market and recession/depression that saw a deep dive in property and retail and corporate taxes. While this was happening the demands on state governments grew as federal funding shrunk or there were unfunded mandates like NCLB that came out of state coffers. It's been a decade long slide that is coming to a head and the options are few.

Raising taxes, like they've done here in Illinois is a stop-gap and the politicians know it...but it'll keep the lights on for the next year. Lets see if other states follow suit. As far as pensions...it's a tough situation as do precious dollars go to those funds or go to schools or fixing roads. Or, are people willing to accept lesser services? The Federal government really can't ride to the rescue here as it's just as broke as the states. The other option is rises in gas and sales taxes that again are stop-gap at best. There's no easy long term solution other than a robust economy with a strong middle/working class...but that's not gonna happen in the foreseeable future.

[mmonk]

18. Guess I need to dump those bonds.

[Statistical]

19. This goes beyond public pensions.

Most pensions, and insurance companies (life insurance & annuities) put a significant portion of assets in muni-bonds.

"erasing" the muni-bond debt in bankruptcy doesn't make the loss go away. It simply transfers it to private pensions & insurance companies and then ultimately to pensioners and policy holders.

[NNN0LHI]

20. That is not the problem though. The problem is that many public pensions are underfunded

http://www.businessweek.com/news/2011-01-19/brown-to-propose-overhaul-for-california-s-underfunded-pensions.html

<snip>Public pensions across the U.S. face a gap of as much as $3 trillion between their recession-battered assets and promised retiree benefits, according to a June study by researchers at George Mason University’s Mercatus Center in Arlington, Virginia. That puts pressure on states, cities and counties struggling with a drop in tax collections.

[Statistical]

21. I am aware of that however if states discharge debt = muni bonds in bankruptcy.

That loss doesn't just vanish. It simply moves from the books of the states to the books of private pension funds, individual investors, life insurance companies, and annuity companies.

From there it moves to the individual policy holder.

The state debt is a liability for the state but it is an asset for someone else.
Remove the liability you also remove the asset.

[AngryAmish]

24. They are talking more about a reorganization, not a a liquidation

Some folks want a state, if it declares bankruptcy, to lose it's state status, revert to a territory status. That will do a few things. One, there is the sovereignty thing that gives an interesting constitutional question of whether the federal government can really force a state to change it's constitution (it can - see Prop 8) but the things in state constitutions like making pensions a property right (if a pension is a property right held by an individual than reducing it is a taking - which requires reimbursement, thus making pensions involate). However, if the sovereign goes away the property right goes away.

Imagine if Illinois ceased being Illinois rather became a territory. Talk about becoming about the most popular place in our continent. FIrst, we could not vote for President so no federal income tax. Second, we would be rid of all the bond debt and pensions. We could probably get rid of the state income tax, rely on a state sales tax or VAT. We would be in the center of the country

Anyway, the bondholders would take a haircut, not get zero, in a reorganization.

[Statistical]

25. While the BK courts are unlike to zero out bonds, any reduction is a loss for the assetholder.

My point is whatever debt/liability the state "eliminates" doesn't "go away" it merely transfered. That loss affects the solvency of the owning entity (pension funds, insurance companies, etc). All you have done is shift that liability from the states books to the private pension funds books.

Most pension funds today would be forced to cut benefits if they took a 30% hit on the principal value (and future cashflow). They are intentionally ultra conservative to avoid that type of capital loss. It is a loss they can not easily absorb. Now if it is a limited event (single state in history of the country files bankruptcy) the loss might be absorbed but if it is widespread it would affect more than the state (and pensioners in that state).

So say State gets 30% haircut on its debt. Great for state but bondholders take a 30% loss. Pension funds cashflow is reduced 30%, pension fund cuts benefit checks to pensioners 30%. Now that is a simplistic example but it illustrates you can't just eliminate one entities liability (partially or in full) without eliminating another entities asset.

[AngryAmish]

27. of course you are right

[warrior1]

22. If they can

bailout banks, why not states. This is never going to happen.

[NNN0LHI]

23. I am all for it

Whats the chances are of getting that spending bill through the current Republican controlled congress though?

http://www.npr.org/blogs/itsallpolitics/2011/01/21/133092500/house-gop-proposes-2-5-trillion-in-spending-cuts-over-10-years

House GOP Proposes $2.5 Trillion In Spending Cuts Over 10 Years

[Statistical]

26. I would vote against it.

Some states have been fiscally prudent, others haven't.
Why should taxpayers in VA for example pay for the mismangement of taxpayers/legislators in IL?

[Yupster]

31. I don't think it's going to happen either, but

why would a Republican House with its members elected mostly from southern and western states agree to bailout the states in the worst shape which are mostly blue states like California, Illinois and Rhode Island.

Texas has just released its budget for the next two years to close its budget gap.

Lots of fees, lots and lots of spending cuts. Not spending any money from its $ 9 billion rainy day fund. So Texas congresscritters are going to vote to bailout Illinois? Not gonna happen.

[burnsei sensei]

28. This is part of an ugly trend.

It seems we are giving institutions more and more license and individuals fewer rights.
The undermining of bankruptcy for the individual person in the last 10 years has been a social and economic disaster.
The powerlessness of the poor will be the paralysis of this economy for the long-term.

[Bandit]

29. Cities...now states,,,what's next the Federal Government?

IMO that is the ONLY way out of our fiscal crisis. Just tell China to lump it...We ain't paying....Spend spend spend like there is no tomorrow (remind anyone of Bush*) and then just default.....and laugh all the way to the bank..

[sarcasmo]

30. Lookout for you're pension, this is what the states want to hear.

[Javaman]

33. Believe me, if a state is contemplating bankruptcy, the state workers are already

taking it on the chin.

Or have we all forgotten about California and Pennsylvania, for example.

I have friends in both states that were cut to 3 days a week and had their pay suspended until the state could cough up the dough.

Granted, declaring bankruptcy would be a lot worse but it's not like we haven't been visiting this concept before.

[shanti]

36. that would be me

from cali. it just became so bad that i decided to retire last month at the earliest possible age and time (55 with 21 years). if they take my pension, i'm a goner.

[WinkyDink]

39. "Public pensions" also include retired public school teachers.

I are one.

[WinkyDink]

37. No offense, but this is a case where "might" is REALLY more appropriate than "may."

[ProSense]

40. Krugman

Krugman:

If you want something to read, look at Iris Lav’s debunking of myths about state and local finances.

[DCBob]

41. Here's the key part from Krugman's artcle..

Should States Be Allowed to Declare Bankruptcy?
Various pundits have suggested enacting federal legislation that would allow states to declare bankruptcy, potentially enabling them to default on their bonds, pay their vendors less than they are owed, and abrogate or modify union contracts. Such a provision could do considerable damage, and the necessity for it has not been proven.

States have a strong track record of repaying their bonds. In most states, bonds are considered to have the first call on revenues; debt service will be paid before any public services are funded. (In California, education has the first call on revenues because of the provisions of a ballot initiative, but bonds are right behind.)

There are no modern instances of a state defaulting on its general obligation debt. One has to reach back to the period before and during the Civil War, when several states defaulted, or the single state that defaulted during the Great Depression (Arkansas), to find examples.

It would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations. The potential for bankruptcy would just increase the political difficulty of using these other tools to balance their budgets, delaying the enactment of appropriate solutions. In addition, it could push up the cost of borrowing for all states, undermining efforts to invest in infrastructure.

<clip>

Some states — such as Illinois, New Jersey, and Pennsylvania (and to a somewhat lesser extent Colorado, Kentucky, Kansas, and California) — have skipped or reduced deposits to trust funds and/or expanded future pension benefits without providing the commensurate funding. Over time, to reach adequate funding, these states may have to institute changes more difficult than the potential solutions discussed below. These states, however, are not representative of states in general.


===============

I think Krugman is right from the big picture but there are a number of states that appear will need some sort of assistance like bankruptcy, to get out of the tremendous hole they have dug.