This page contains a single entry from the blog posted on January 21, 2011 4:45 AM. The previous post in this blog was A native son of Grants Pass, in deep kim chee. The next post in this blog is Oregonians on food stamps: 748,886. Many more can be found on the main index page or by looking through the archives.

E-mail, Feeds, 'n' Stuff

Friday, January 21, 2011

State government bankruptcies?

Don't laugh.

Comments (22)

I'm not surprised that my own unbearable cross, John "Man On Box Turtle" Cornyn, is involved with this. The common joke out here is the fastest way to castrate any number of Texas CEOs is to kick Cornyn in the chin. Considering that Texas is now drowning under a $25 billion budget shortfall (mostly due to the governor and our Congresscritters passing out massive tax cuts to businesses that didn't even ask for them over the last fifteen years), the current proposed budget already makes deep cuts into education and libraries. It's only logical that Cornhole and his buddies will try to cut off state government pensions...so long as theirs stay intact.

I noticed that bankruptcy lawyers are in the front, pushing for this legislation. What a surprise.

Let's understand exactly what is going on here. After Pres. Reagan defeated the Air Traffic Controllers public employee union leaders realized they could not obtain their goals by traditional work stoppage threats. So they turned to the ballot box, agreeing to support candidates of any party and of any ideology that would increase public employment, wages and benefits.

The politicians recognized this support, but also recognized that public finances would not support huge inceases in wages. Hence the "payoff" was in the form of benefits, which fly below the radar and pensions, which were costs deferred until the future when those politicians were out of office. This bargain allowed expansion of public services and employment, increased compensation and lower tax increases.

The public approved this process through the electoral process because it fulfilled public fantasy, namely that you can have increased government spending and lower taxes. Well this is the "free lunch" that economists say is not possible, and now the bill is coming due.

In order to default on the promises politicians made to public employees bankruptcy is necessary. This legally allows a governmental unit to get out of contractually obligated payments. An additional benefit for Conservatives is that it punishes and weakens public employee unions.

State and local governmental unit bankruptcy will further the Great American Illusion, namely that we can have higher government spending, lower taxes and balanced budgets.

Just one more reason not to put a dime into any municipal or state bonds right now. Frankly, it does not surprise me at all that state bankrupcies are being contemplated. At least 40 states are in some sort of financial distress - with no easy solutions to bail them out..

Don't ask me how to make this happen, but Chapter 11 style bankruptcies (reorganizations) would probably be the best solution when default hovers over the financial detritus of state mismanagement, with a financial control board (debtor and federally appointed representatives)and appointed chief financial officer given approval authority over state expenditures.

Smart states will stop/reduce giving grants, revenue shares, subsidies or whatever it's downstream payments are called to localities because municipalities can go through a standard bankruptcy, or be directly accountable for raising taxes from their constituencies. Leave them holding the debt.

The sooner what I am recommending, or something like it starts, the better off we all will be.

It's hard to see how bankruptcy solves anything more than short-term problems. People want government — they just don't want to have to pay for it. Recent polls show that people overwhelmingly prefer spending cuts over tax increases, but oppose cuts to entitlements. And public employees will still be on both sides of the negotiations over their pay and benefits.

You knew it was going to be this or a huge fed bailout for places like OR or CA.

Now, can taxpayers declare bankruptcy or loan modification to reduce paying into PERS and PFDR?

I wonder if we'd be in this mess if public employee pensions, and related benefits, were mandated to start after age 65.

Seems more likely to me that the Fed would somehow get involved in a bailout.

Anyone here really believe that the worst of the Great Recession is behind us?

I'm not sure bankruptcy is the answer here...

Let's assume that many states do declare bankruptcy to get out of public pension obligations. That's fine, except that just means that many more people who will be using public resources in other ways, generally funded through the federal government. In essence, the feds will bail out the public employees' pensions.

We don't even need bankruptcy to do that...the federal government in cooperation with the states could allow states to suspend/terminate the pension plans, take whatever money is in the plans and give it to the workers as a one time cash-out that they can invest however they want (or if over age 60, just cash it out). Or, they can keep the money in the pension plans, but deny them access to Social Security and Medicare (just like railroad workers who have the Railroad Retirement Board in lieu of Social Security.)

What is needed is control over spending to prevent states from blowing more money on pet projects like light rail/streetcar lines, redevelopment, and the like. The feds are definitely in cahoots with the states and the Capitol can certainly end all of those programs right now (but of course they won't, because they'll have to explain to constituents why the pet project in their district won't be funded...and of course Oregon's delegation loves to bring home the bacon.) Oregon blew $40 million on two trains to run between Portland and Eugene that are, on average, 25% full; instead of using the money on needed transportation project backlogs; ODOT, under the direction of the State Capitol, has blown money bailing out multiple railroad lines and railroads, only to see the railroad lines go dormant (at least they have wised up and didn't give any money to Coos Bay.) What we need are elected officials with the guts to go through and cut the fat...which they all promise they'll do, but they never do.

I am not a lawyer, although I play one on television, but I do not see how a state may default on its pension payments without declaring bankruptcy, since those payments are contractural obligations. At a minimum the default on pensions would have to be court administered, which is in effect a bankruptcy.

The reason you do not have elected officials with the "guts to go through and cut the fat" is that we will not elect those who are willing to do that. We are conditioned to beleive that we can keep current levels of spending without raising taxes or even running a deficit. Example: New Jersey has this supposedly tough governor who is not afraid to take on the special interests. How did he handle a pension contribution that the state did not have the cash to make?

A. Cut other government spending to make the contribution
B. Raised taxes to make the contribution.
C. Got the Legislature to change the Pension System.
D. None of the Above.

The Answer is D. He just did not make the contribution, leaving the problem for future office holders and taxpayers to deal with when he is safely out of office, although he has taken considerable time to lecture the populace and other government officials about "taking responsibility" and "making tough choices".

Not exactly Profiles in Courage material.

Here's my pitch: we need to set up an insolvent state program with a priority schedule for discharge of state obligations. The highest priorities would be general obligation bonds and vested pension obligations.

Permit states to discharge a capped percentage of the top priority debt (say 10%) with other categories of debt holders qualifying for progressively tighter haircuts. You would need to permit states to restructure the remaining debt.

I would expect that even this lifeline will not be enough (or politically impossible) for certain states (IL, CA, NY). For those the federal government should provide bailout financing only if all federal bailout money is voluntarily accepted as debt (with conditions).

First, federal bailout loans to states should not be dischargable in bankruptcy (like a student loan).

The terms of the loans should require participating states to consent (see, Art. V of US Const) to having one US Senator until the loans are repaid. States in default would lose their all Senate representation until payments are made current.

I think we need to approach this with the idea that it is going to be the Second Reconstruction Era for the US. Debtor states should have to sit in the backseat until they make good, otherwise an aggregation of defaulting states might try to change the rules down the road.

Sid, Christie put out a plan in September to roll back a special 9% pension increase granted by earlier political regimes, changes the normal retirement age from 55 to 65, sets pensions based on high 5 instead of high 3 paid years, increases employee contributions, and reduces/makes COLA adjustments based on investment performance. These or something very much like them are all necessary adjustments, pure and simple.

And if there were going to be some federally administered bail out process I would recommend applying the conditions applied to defaulted private pensions by the PBGC. That would get people's attention quick, very quick.

I think what's more likely is the federal Pension Benefit Guaranty Corporation (or a new entity along the same lines) will be empowered to take over and administer states' public-employee pensions, topping up (at taxpayer expense, of course) the ones that have been underfunded.

I follow this stuff pretty closely as part of my consulting. I am aware of proposals made by Christie and others, both Republicans and Democrats, Liberals and Conservatives to change the systems. That is not the point I was making.

The point I was making is that the New Jersey Pension Fund is seriously underfunded, and a supposedly no-nonsense, hard nosed Governor like Christie just took the easy way out, because he knew that cutting services or raising taxes was politically damaging to him. It is easy to be a fiscal hero when you just do not make required payments and pass the problem onto your successors.

Sid wrote:

Christie just took the easy way out, because he knew that cutting services or raising taxes was politically damaging to him

You aren't seriously saying that they cut services in NJ?! Why do you think he's been so vilified by the public employee unions?

Maybe your point is that he didn't cut services enough (in one year) to make the NJ Pension Fund solvent. That would have required pinkslipping over half of the public employees (for the purpose of shoring up their pensions).

Not sure the public employee unions would have been any happier with that result. Just admit that you are mad because you wanted him to raise taxes and he refused (with 60% support of state residents).


I'm confused. I thought municipalities could not declare bankruptcy. But several have so far. Please advise.

Municipalities can -- Chapter 9 of the bankruptcy code, I believe it is. So far, states can't.

Yep, cities (like Vallejo, CA) can file under Chapter 9. But as this article points out, even declaring bankruptcy may not solve all of Vallejo's problems since it is still not addressing the problems with public employee pensions:


Monica Davey, in today's NYT, offers some perspective on the most recent collapse by a state: Arkansas. Four grafs are suggestive:

"...plenty of experts on municipal bonds and government finance — who view as alarmist the notion that a state may default on its obligations — note that it has been decades since any state actually defaulted on its bonds, or, in their view, even came close.

As it happens, the most recent such collapse occurred during the Great Depression, when Arkansas found itself, in the words of one state historian, 'plain, flat broke.' There are familiar threads then and now, not least of all the overlay of a national financial slump.

But in many ways, the situation in Arkansas was a unique set of decisions and woes, piled one on top of the next, and a case study, some contend, in why this will not happen to states today. As that thinking goes, times now for states are undeniably grim, but not as grim as they once were in Arkansas. But should a state find itself near default, there is also a lesson in Arkansas, where the fallout lingered for decades."


"In the eyes of John A. Dominick, a professor of banking and finance at the University of Arkansas, a series of financial struggles — including the experience of 1933 — has created an unwritten tenet that still ripples through the state’s culture: Never spend more than you have."

Ms Davey provides no suggestion that any state bankruptcies occurred prior to AR's.

I think you're confusing default with bankruptcy. Bankruptcy is a legal proceeding; states can't avail themselves of it.

Thought for Today: "Many excellent words are ruined by too definite a knowledge of their meaning." — Aline Kilmer, American poet (1888-1941).

Clicky Web Analytics