Should states be able to declare bankruptcy?

[Politically_Incorrect12]

www.msnbc.msn.com/id/41188877/ns/business-the_new_york_times/?GT1=43001

Plans being drawn up to let states declare bankruptcy Pensioners and investors in state bonds could lose out


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 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.

The economic downturn initially seemed to hit men harder, but that is starting to change. 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.

[Politically_Incorrect12]

There is more to the article for those interested, but what are some thoughts on allowing states the option of declaring bankruptcy?

[Savoir Faire-Demogague in NJ]

Burdensome pension plans and extravagant state work benefit packages are only part of the problem. The biggest problems is bulging social programs that are also eating states alive, especially those that are mandated by the federal govt and those that are unfunded.

[fairlycrazy23]

I'm really not sure if states should be able declare bankruptcy, what kind of restrictions would the state have to take on in exchange for relief from there obligations.

[traelin0]

The problem with allowing states to declare BK is the unknown strings that would be attached to such an event. Would they have to cede sovereignty?

[handyman2]

If they are allowed to do so it will make a major impact on many segments of society. What is the right answer/ I don't think anyone has the answer yet.
I think a better way would allow the cities to reduce financial obligations by a workable percentage. This would include pension and hourly wages till they are able to reach a balanced budget. This may also reduce some services.

[SweetVirginia]

I am not an economics expert, I will admit , as I always have. But, my instincts tell me that we should never have bailed out the "too big to fail" wall street corporations which some of them appear to be even "bigger" now than when we bailed them out.

With that, I feel the same about individual states. I live in one of the states that is in financial ruins, California. I have lived here my entire life. I love this state, but I cannot be blind to the massive financial mistakes the state government has made. I feel that if we allow this state to officially file bankrupt, or if the feds bail my state out, it will simply encourage other states to create a financial mess, and expect to be bailed out.

I am a high school teacher in Southern CA, in a city that is populated predominately by illegal immigrants. My students are very open about the services that their illegal immigrant parents get because of them or because of their American born siblings. Bottom line is, CA spends millions if not a billion for the children of illegal immigrants each year. Many illegal aliens do not pay into our state tax system. I truly believe that the main reason why CA is going bankrupt is because we have the largest illegal alien population. Why should the rest of the country have to pay for CA's irresponsibility when it comes to illegal aliens and their children? I do not believe that they should.

I know that my liberal colleagues on this site do not agree with me on this issue, but I wish that they would come to terms with the fact that illegal immigrants are putting a major financial strain on states that give them sanctuary.

[fairlycrazy23]

I think LA county Supervisor said welfare costs for anchor babies topped 600 million in 2010 not counting the cost of education.
Illegal immigrants are typically low wage earners so even if they are taxed completely it is likely there welfare costs would exceed there tax contribution and end up being a net drain.

[sanityjones]

If states are able to declare bankruptcy (they will not of course, it's merely a chicken little tactic), then imagine the chaos that will unfold amongst the financially irresponsible segment of society. (you know, those people who burn their own habitats when they don't get their way). I can hear it now........."When states don't pay their bills why in the Hell should I"..........

[fairlycrazy23]

Whether the state goes through a 'bankruptcy' or not won't change the fact that states still won't be able to pay there bills. Some states have already done it with tax refunds, issuing IOU's instead or just delaying the refund. I think in the past some states have changed the withholding amount so that people would be do bigger refunds, but at least the state was able to use the money for a while.

[SweetVirginia]

I dont know what the answer is, but I believe that one reason why CA is having financial trouble is because CA has the largest illegal alien population. I dont see how anyone (on the pro illegal side) can deny this.

[traelin0]

Jan 22, 2011 23:40:33 GMT -5 @sanityjones said:

If states are able to declare bankruptcy (they will not of course, it's merely a chicken little tactic), then imagine the chaos that will unfold amongst the financially irresponsible segment of society. (you know, those people who burn their own habitats when they don't get their way). I can hear it now........."When states don't pay their bills why in the Hell should I"..........

I refer to them as the Free Shit Army, sanity. This country has more FSA members than not. And they are way too deluded in their belief set to understand how wrong they are until our profligacy is cut off by the world.

[traelin0]

Jan 22, 2011 23:09:11 GMT -5 SweetVirginia said:

I am not an economics expert, I will admit , as I always have. But, my instincts tell me that we should never have bailed out the "too big to fail" wall street corporations which some of them appear to be even "bigger" now than when we bailed them out.

You're absolutely correct, and I was one of the few vocal people who made the same case before TARP was passed. What a stupid move on my part, to explain the theory of "moral hazard" on a board such as YM. It gave me no pleasure to say "I told you so" because it involves the debasement of the currency, which affects the poor and middle class the worst.

[fairlycrazy23]

Jan 23, 2011 6:08:05 GMT -5 @toughtimes said:

One of the major reasons for all of this is that we want to export our jobs and production overseas while still expecting the jobless to pay taxes and buy things.[/quote

We and I guess you mean companies don't want to export jobs; we the American people want cheap products and because of a variety of factors they (the companies) can not produce cheap products domestically, so they have to move production off shore.

[Deleted]

Should states be able to declare bankruptcy?
About 3 or 4 years ago my BIL & SIL declared bankruptcy. They were a classic case of the bankruptcies that I've seen. Poor decisions on a daily basis plus a love of toys (for the whole family). I don't think they ever admitted that they had a spending problem, somebody else made them declare BK (of course). Anyway here it is 3 or 4 years down the road & not a thing has changed. They still spend like they were rich & still buy toys.
What does this have to do with states declaring bankruptcy?
Simple, if states are allowed to declare BK they will be just like my BIL & keep spending. Elected officials don't care about racking up huge debt, they only care about getting reelected. You get reelected by spending money in the areas of the voters that vote for you. Sorry but this needs to be faced & officials need to make some hard choices. We need to cut spending & cut welfare programs. Unproductive people need to stop relying on the government to take care of them (those that can work, of course) & they need to understand that if they don't work, they don't eat. That will MAKE them become productive members of society & then we can tax them to further improve cash flow.

[Deleted]

People who have involuntarily become unproductive because their jobs have been spirited away may find new productive employment--as bank robbers, muggers and housebreakers. Be careful what you wish for.

Yes but they also might find a cure for Cancer. Almost anything is possible if you use words like may & might. Around here they also might get shot. One less mouth in the government trough & (hopefully) they wouldn't have reproduced before they died.

[SweetVirginia]

Around here they also might get shot. One less mouth in the government trough & (hopefully) they wouldn't have reproduced before they died.


Thats way harsh.

[rockon]

As was mentioned earlier. When an individual or company or a state cannot pay their debts then they are insolvent or bankrupt. So it really is not a question of "should they be allowed to go bankrupt?" The only question is will they be allowed to have legal protection from their creditors and be allowed to go through their insolvency under the guidance of a court. My guess is that some of these states are to far underwater to remain solvent under their current obligations and trying to raise revenue will just encourage more people to leave which would only compound the problem so they people who the states have obligations with would probably be wise to try and negotiate reduced payments that may help keep their state solvent and then demand that their state stay within their budget moving forward.

[ugonow]

I know that my liberal colleagues on this site do not agree with me on this issue, but I wish that they would come to terms with the fact that illegal immigrants are putting a major financial strain on states that give them sanctuary.

Truer words were never spoken. And giving them education,services,healthcare,etc just draws more illegals,creating an even bigger drain. Quit encouraging them here.

[fairlycrazy23]

Jan 24, 2011 10:39:52 GMT -5 rockon said:

As was mentioned earlier. When an individual or company or a state cannot pay their debts then they are insolvent or bankrupt. So it really is not a question of "should they be allowed to go bankrupt?" The only question is will they be allowed to have legal protection from their creditors and be allowed to go through their insolvency under the guidance of a court. My guess is that some of these states are to far underwater to remain solvent under their current obligations and trying to raise revenue will just encourage more people to leave which would only compound the problem so they people who the states have obligations with would probably be wise to try and negotiate reduced payments that may help keep their state solvent and then demand that their state stay within their budget moving forward.

This is accurate, the question is not should states be allowed to declare bankruptcy, the question really is "What should be done to fix the states that are effectively insolvent?"

You can either increase revenue, decrease obligations or some combination.
There are many obligations that the State can not reduce unilaterally. And there really is very little the states can do to increase revenue, raising taxes generally is counter productive and I'm not sure if they have enough assets to sell off to make a dent.

So it may take some 3rd party empowered with authority similar to a bankruptcy judge who can mandate changes in the way the State government is ran and eliminate or rewrite contracts and other obligations.

It seems like it would take a change to either each individual States constitution to allow such authority to be given to a 3rd party or an amendment to the US constitution.

[skweet]

Crazy23 has it just about right, except there exists the third option of bailout. Remember that are insolvent are often in the situation due to excessive burden of Obama voters (much like the companies that we bailed out). This gives the POTUS a strong incentive to find a way to fund states' obligations from national coffers. Barring federal bailout, I don't think whether or not they are allowed, they will be bankrupt. If they were able to negotiate better contracts with the unions, they would have long ago. If they were able to provide less social handouts, they would have long ago. These gifts have been given, and are expected. Raising taxes will send taxpayers to other states (you know those flyover states that people think you can't live in), and therefore tax revenues will decrease, and lowering taxes is not immediate enough to solve the immediate problem. Either a national bail-out, or a forced restructuring (bankruptcy) are the only real choices.

[verrip1]

No to bankruptcy by states. They whine about how the pensions are the problem, yet the solutions are right in their hands - cut spending immediately.

The states will whine and threaten to cut police and fire, where some cutting will be necessary. Yet they fail to cut the easy money for things like Integrated Waste Management Boards, Barber certifications, empty transit trains and buses, etc., smaller costs which will NOT solve the fiscal problem by themselves, but will start the worthwhile process of de-regulating society at the state level. After cutting the funding, they will follow up and eliminate the laws which created them. Jerry Brown's focus on CA state employee cell phones seems to be well founded, but it's only an isolated thing to divert attention from how far all the problem pervades everything government does. Privatization of government activities is an option that insiders oppose vehemently, so we get rid of those insiders! Across the board salary cuts are essential.

The pension solution will take time. Renegotiate the pensions for new hires immediately. Or bust the unions. If they cut the pensions for current employees, they will be sued and forced to pay anyway. Extend the retirement age for new hires and lengthen the time for vesting.

Allowing bankruptcy simply enables and rewards the excesses of state governments.

[fairlycrazy23]

It is true that bankruptcy may reward the excesses of government, but it may require a 3rd party coming in and fixing it for them so that the 3rd party can be blamed.

But I actually suspect that the Fed's will pick up the tab, it might not be a direct bail out ,they could direct that the PBGC take over the pension of public workers in state XYZ, but at the same time ensure that those pensions are paid at 100%, even though the PBGC doesn't even have enough to pay it's current obligations, and then just bail out the PGBC

[skweet]

The easy money should be cut, but saving pennies is marginal, and actually savings need to be found. They will ultimately cut the pensions, to which they never should have agreed, and it will be in a bankruptcy court, so no lawsuit is necessary. The truly sad part is that pension and union benefits will be only a part of the whole of losses. Lenders that hold municipal debt will also be forced to take a haircut, and that will raise the cost of borrowing for all states. Higher borrowing costs equals less ability to increase services and infrastructure. Hopefully most insolvent states can just reverse deals that were financially infeasible from the beginning.

[fairlycrazy23]

Municipal bonds have always been considered extremely safe..its what you put widow and orphans money in... or at least it was.

[skweet]

They were considered safe when they were protected by certain remedies in bankruptcy law. From GM and Chrysler, we learned that bankruptcy law only protects bond debt when enforced, and law only needs to be enforced on an occasional basis.

[verrip1]

Jan 24, 2011 18:05:30 GMT -5 skweet said:

They were considered safe when they were protected by certain remedies in bankruptcy law. From GM and Chrysler, we learned that bankruptcy law only protects bond debt when enforced, and law only needs to be enforced on an occasional basis.

BINGO! Obama in one act of arrogance drastically changed the risk metrics between bonds and stocks. IOW, why would people accept the lower returns of bonds without assurance of priority in repayments? This is a macroeconomic shift of significance. And it won't be good, either. Obama really screwed the pooch on this one, and the penalties will be the continuance of a lousy, job loss economy.

[973beachbum]

No to bankruptcy by states. They whine about how the pensions are the problem, yet the solutions are right in their hands - cut spending immediately.

I live in NJ and this is what I hear all the time. They have also cut the pensions of future hires but if you drop them then no one is paying into them which will make the problem worse not better. This is what Gov Christie said on it yesterday.

Instead, he said the unfunded total in the state health and pension systems, which amounts to $120 billion to cover those currently in the systems, gives those state workers more reason than ever to consider reform that avoids bankrupting the accounts.

"If you work with me, you'll have a pension," he said. "If you don't, you won't."

The state's entire budget this year was $29.4 billion, he said. "So you're talking about closing down the entire state government for four years, everything, just to close that gap," he said.

Not cut, shut down everything just to cover the unfunded, not the funded parts of the pennons and health care liabilities.