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Letting States declare bankruptcy

Discussion in 'BBS Hangout: Debate & Discussion' started by updawg, Jan 21, 2011.

  1. updawg

    updawg Member

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    maybe this was part of Perry's plan all along...

    A Path Is Sought for States to Escape Debt Burdens


    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.

    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.”

    link
     
  2. glynch

    glynch Member

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    "It is sad for states to go bankrupt and default on old teacher's pensions and have the tuition for public universities balloon etc. , but we must give tax breaks to millionaires and billionaires." The GOP.

    The only thing that will put an end to this shiet is an aroused lower and middle class led by someone who wants the other side to start fighting back in the class war.
     
    #2 glynch, Jan 22, 2011
    Last edited: Jan 22, 2011
  3. Air Langhi

    Air Langhi Contributing Member

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    I don't really see another way. medicare, ss, interest take up the majority (70-80)% of US tax revenue. States probably face the same problem. The problem is politician promise the moon when they are in office and leave the problem to the next generation.
     
  4. glynch

    glynch Member

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    You don't need to cut back if you incrase taxes on the wealthy back to historical rates for an extended period of time and wait out the business cycle. Period.

    PS: your corporate media owned by billionaires won't tell you this.

    Ever wonder why?
     
  5. Dubious

    Dubious Member

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    Historically, it ends with pitchforks and guillotines as the army refuses to fire on the people.

    "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time."
     
    1 person likes this.
  6. KingCheetah

    KingCheetah Atomic Playboy
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    What could possibly go wrong?
     
  7. RedRedemption

    RedRedemption Member

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    The rich get richer and the poor get poorer.

    If the scales don't balance soon, its going to be irreversible.
     
  8. ghettocheeze

    ghettocheeze Member

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    Too many pathetic response in this thread with the usual class warfare innuendo attached. It's the same old "rich people are destroying the country" crap.

    BTW all these states nearing bankruptcy already have their own STATE INCOME TAXES which are the highest in the nation. California, Illinois, and New York are the ones teetering near collapse and are perhaps already insolvent. So, please save the BS for some other thread. These troubled states have a history of piss poor budget management which has nothing to do with anyone getting a tax break at the federal level. This has always been about biting off more than you can chew. These states have managed their budgets with the same logic as the guy who refinanced his house to buy a new plasma TV, a nice car, and load of other crap, all the while telling himself that the value of his property will never decline so it's time to live it up.

    Go through their budgets and see how many entitlements and public sector freebies make up most of their budgets. Then, look at their confiscatory and hostile policies against business especially the industrial kind. Hordes of firms have migrated away from these states and in the process the revenue stream for these states has all but completely dried.

    Finally, none of these states has a competent government willing to shut itself down in order to save itself. You hear the constant whining about declining revenue without the necessary declining expenditures. Thus, these states are running around hat in hand, looking for that sucker willing to finance their addiction for spending.

    Personally, I always say N-O to the junkie standing on the street corner begging for money and we should do the same for any state looking for a federal bailout. Learn to fix your own mess.
     
  9. SamFisher

    SamFisher Member

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    It's interesting - and by interesting, I mean skull-****ingly boring because it's so incredibly predictable - that you omit income tax-free states like Nevada and Texas from the list of states whose budgets are imploding with massive revenue shortfalls.

    This is an incredibly inconvenient fact for wingnuts becuase it really tends to undercut the magical thinking syllogism they have regarding taxes and revenue - but then again, if I was trying to argue that x -1 > x, where x is a positive number, magical thinking comes in quite handy! :)

    So, the question is - did you do this do to your own ignorance of these facts or because you thought you could somehow get it by us? (very odd in that there's a thread about Texas' issues right near this one, which makes you perhaps the stupidest of all)? Or are you just that intellectually dishonest?

    Either way, it reflects quite poorly on you. You may want to take a break from this thread.
     
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  10. ghettocheeze

    ghettocheeze Member

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    Quite a read Sam, after all delusion is perhaps you greatest asset. Please point to the part of my post where Texas was even mentioned? Did I ever make that comparison or was that your own assumption?

    I pointed out the fallacy in the posts above mine that somehow federal tax cut have led to states going bankrupt. I broke down this flawed argument by pointing out that those very states going bankrupt have their own power and authority to tax at the state level so the whole federal tax cut for the rich argument is patently false. California and the likes are not going belly up because the rich won't pay an additional 2 to 3 percent in federal tax. No, the problem is much bigger and deeper than that. The real issue is declining revenue without the necessary budget cuts that are needed to balance the sheets.

    Like you said, even tax-free states like Nevada and Texas aren't immune to huge budget shortfalls. But then again, Texas isn't at the front of the line looking for a federal bailout. We have a major budget crisis but we are going to address it through major program cuts and overall reduction in spending. That is the only way states can save themselves from complete collapse.

    The meat of my argument is that Tax-Free states are in a slightly better position because even with the huge budget shortfall, they are more likely to cut spending since they lack the power and authority to tax income at the state level. See how the magic works? You take away the "get out of jail free" card and politicians actually have to balance a budget instead just raising state income taxes like many of the the states with the power to do so are doing.

    Again, I'm arguing for states to balance their budgets regardless of their power to tax. Some tax-free states may have it worse than taxed states but that's again budget mismanagement. No state income tax is only the first step towards a balanced budget not the mother-of-all solutions.

    Do you understand any of these simple ideas? Or are you going to just continue to insult me to earn some much needed internet rep?
     
    1 person likes this.
  11. Steve_Francis_rules

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    Um.. that was exactly his point. You said all the states with major budget issues have their own state income taxes, which completely ignores the states that don't have income taxes but are still having budget crises.
     
  12. Steve_Francis_rules

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    In your world, does (x - 1) compare differently to x when x is a negative number? :confused:
     
  13. Air Langhi

    Air Langhi Contributing Member

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    You can increase taxes on the rich, but you still have to find a way to renegotiate the entitlement programs. The problem is too many will be getting old very soon.
     
  14. DaDakota

    DaDakota Balance wins
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    The US government needs to declare bankruptcy !!

    DD
     
  15. rimrocker

    rimrocker Member

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    Pensions have been a long simmering problem...
    What's amazing to me is that the fully funded number was so low in 2006. I was thinking the crash crippled a lot of state pension investments out, but I guess it just drove the nail in the coffin.

    Anyway, I remember hearing stuff about pensions during the campaigns in the 1990's and nobody did anything about it then or since.

    Still, to spend decades cutting taxes and making bad budget decisions and then turn around and intentionally break a promise to people is not cool.

    If times are so desperate that everything must be on the table, how come everything's not on the table?
     
  16. Refman

    Refman Member

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    I honestly believe that, in today's economic reality, it is odd that when one speaks of taxes on the "wealthy," we talk of taxing a person making $250,000 the same as a person making $1,000,000 (which is the same as the person making $10,000,000).

    It seems to me that a lot could be accomplished with the introduction of two or more progressive brackets.
     
  17. SamFisher

    SamFisher Member

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    We talk about taxing them at the same marginal rate, not the same amount.

    For example, if not for the aborted Bush tax cuts, the 250,000 earner would have been forced to deal with the crushing burden of about $300 dollars in additional withholding annually. The million dollar earner would have had to pay substantially more.

    But anyway, good luck introducing higher tax rates on the most powerful people in the country.
     
  18. da_juice

    da_juice Member

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    So, we're just gonna magically let the debt go away? What a great idea.
     
  19. robbie380

    robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
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    man please let me be short the market the day before that happens :cool:
     
  20. SamFisher

    SamFisher Member

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    **** gets crazy when you deal with negative numbers man. I don't even go there.
     

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