Policy makers trying to come up with a way for states to declare BANKRUPTCY!

Discussion in 'Economics' started by S2007S, Jan 21, 2011.

  1. S2007S


    Yep you heard that right, coming up with a new way to "escape" debt burdens......simply amazing that they are going to try and come up with something to get states out of debt....and all I keep hearing is how the recession ended months and months ago and that the economy is on the right track. How many states have no money left and are looking for a quick fix....how many states are looking raise taxes that will lead to the departure of businesses and taxpayers and create huge amounts of lost revenue streams and fewer jobs for the ones remaining behind to foot the increased tax hikes...states are too afraid to cut state jobs and do something about the unions and pensions so instead of doing anything of that sort tax hikes are possible.

    States have reported a record $191 Billion in DEFICIT spending in 2010 and another $300 BILLION++ is being projected for the next 2 years...Also published by the National Center for Policy Analysis its reported that pension plans are underfunded by $3 TRILLION, supposedly more than THREE TIMES the amount that states are officially reporting!!!!

    So who is going to pay up for this next mess.....Seems Bubble ben bernanke is going to be busy trying to come up with new ways, maybe he will throw each state a Trillion dollars each, that will be an easy quick fix......at this point the only answer everyone has, is to just pump the system with more worthless dollars, how many trillions more is anyone's guess but I can certainly tell everyone that is not the answer into fixing this great credit crisis were in today! Time will show that what Bubble ben bernanke is doing is not the answer.

    Path Is Sought for States to Escape Debt Burdens
    The New York Times | January 21, 2011 | 05:45 AM EST

    Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.

    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 [ GM 37.12 -0.06 (-0.16%) ] 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.

    Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout.

    Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

    “All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

    For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe.

    No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

    House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate.

    It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.

    Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.

    Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

    “They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees.

    “We’re taking this very seriously.” Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause.

    The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.

    “States have adequate tools and means to meet their obligations,” the report stated.

    No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.

    Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute.

    Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.

    Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed.

    That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.

    But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments.

    A deeply troubled state could eventually be priced out of the capital markets.

    “The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.

    Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.

    He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.

    “Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”

    Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.

    “We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.

    A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard.

    It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.

    “I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.

    Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments.

    Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.

    Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.

    The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.

    Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority.

    It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.

    “I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”
  2. Too many tit-suckers have been promised waaayyyyy too much.. much more than can be honored. Must face up to facts. Let the states/municipalities go bankrupt and restructure all debt, plus government employee salaries/benefits and social obligations.

    Let the bondholders suffer a haircut. Maybe in the future investors will do better DD when considering buying muni debt.. which should hold issuers' feet to the fire on reckless promises and spending.

    It's the only way.
  3. Bob111



    i as expecting this 2-3 years ago,ready to buy some stressed munis or muni ETF's. somehow they managed to keep this one quiet,but as we can see- it's only a matter of time..good that IB now have direct access to muni bonds...i'm going to keep an eye on them and listen this-

  4. I heard today a news report is schedule for 1 pm, anyone have any news.

    “Reality Check: The Truth About State Budgets, Bond Debt, Pension Obligations, and Retiree Health Costs.”
  5. Its pretty obvious that no matter how high taxes are raised that the pensions promised can never be paid, because the higher they go, the more likely anyone with money will leave....

    That doesn't leave any other option.
  6. GTG


    The primary motivation for the proposed "state bankruptcy" laws is to give the states a way to change the terms of the contracts with their existing and retired public employees. The laws would allow them to renegotiate their current union contracts, and come to a settlement with regard to the existing pensioners.
  7. Today is Friday you putz the release said Thursday. I cannot find this article.

    I found this.

    Claims that states and localities are facing massive budget gaps, unfunded pension liabilities, and health care costs that will lead to bond defaults and bankruptcy filings are greatly exaggerated, and mask the need for states to overhaul out-of-date tax systems and make other structural changes, a new report warns.

    The report rejects claims that state and local governments have too much debt, used in part to finance operating costs, and that there is a high risk that a significant number of them will default on their bonds.

  8. Bob111


    this might explain recent sell off in muni's ET's
  9. how much of that $1 trillion in monetized debt is / are directly attributable to the horrific damage done to the US, the American people, the upsetting and debasement of the American middle class by the 8 (eight) year Bush II administration and its policies?

    how much?, certainly more than 3/4 of it, because he received a surplus and no 30yr T-Bond debt, and look at where we are at now, and what it is taking to stop that death spiral that that administration caused...

    mission accomplished...
  10. Well you know what needs to be done, bust the pension contracts. This would take an act ln legislature and no politicians will go down that path because of the consequences. A bk would make this possible and no politician would be held accountable.

    Ironic that a politican can send a pensioners son off to war but don't mess with his pension.
    #10     Jan 23, 2011