Can states declare bankruptcy?

[CCTAU]

No. Not at this time. But legislation is being pondered to allow it to happen.
My personal feeling is to go ahead and set this up. If we do not give states a way to restructure when they are in trouble, the only other option is for me and you to pay for it through a government bailout.

The fear is that it might hurt retirees and investors. This may be, but it is not my responsibility to either of them. If you want to get upset, start with the union contracts that states abide by. Start with the inept politicians that want to fund the poor with nothing coming in.

A Path Is Sought for States to Escape Debt Burdens
nytimes

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MARY WILLIAMS WALSH, On Thursday January 20, 2011, 8:56 pm 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 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.”

http://finance.yahoo.com/news/A-Path-Is-Sought-for-States-nytimes-1316605857.html?x=0&.v=1

[RWS]

The fear is that it might hurt retirees and investors. This may be, but it is not my responsibility to either of them. If you want to get upset, start with the union contracts that states abide by. Start with the inept politicians that want to fund the poor with nothing coming in.

I contribute to an RSA retirement plan, and I am not a part of any union. I agree, it isn't your responsibility directly as a taxpayer to deal with my retirement. However, I gave the state money out of my check for my retirement. They invested it to make money. At some point, they made money off of my money. When I hit 25 years of service, somebody better have my damn money. Why is it right for me to get fucked out of 25 years of contributions, when I was the one contributing my money to it?

Over the past two years, my dad has lost nearly $20,000 out of his 401(k). He doesn't work for any form of government, and doesn't have state retirement. That's the risk he takes because of how his money is invested in the stock market with the 401(k) he contributes to through his employer. It changes things a little when you are investing your money in the state, I think. Maybe I'm just biased because I contribute to RSA. I just think trusting the state with your money is a little different than investments in a private portfolio. I understand that the state turns around and invests my money into a pretty wide portfolio, but the state isn't T.D. Waterhouse, Ameritrade, E-trade, etc. It's a government entity, and while they are investing it into certain portfolios tied to the stock market, they're also investing it into things like US bonds, and various US guaranteed securities.

Bottom line, if I gave 5% of every paycheck for 25 years (participation is required, so I don't have a choice) for the state to make money off of, to benefit the people of he state, how is it fair that the state can just fuck me out of that?

[CCTAU]

If SS goes ass up, how is that fair to any of us. If you are planning on the government for your retirement, then you are in trouble. And if a state goes balls up, is it my fault? People choose to work for the state becuase they feel the benefits outweigh what they would make elsewhere, but those benefits are not guaranteed if the state cannot manage its own money. And it should not be the federal government's responsibility to bail the states out. The state is your company just as a company is mine. Why should the state not have the ability to restructure? By saying what you say, you are essentially following union principles in that if you do not get what you want, then everyone should go down with the ship. I wold hate to be in your shoes if Alabama did go bankrupt. But in order for the state to survive, they would need some recourse. It might end up poorly for you.But how wold that differ from all of the folks that lost money from their company in the same situation? It is a reality that we all may face at some time or another.  What make state employees different?

Maybe we should allow other states to buy the failed state. That way they would still have to take on the debt, but they would govern more land and people. Hmmm.

I'm from Alassippi. Where you from?

Well, I'm from Tenntucky.

[Token]

If SS goes ass up, how is that fair to any of us. If you are planning on the government for your retirement, then you are in trouble. And if a state goes balls up, is it my fault? People choose to work for the state becuase they feel the benefits outweigh what they would make elsewhere, but those benefits are not guaranteed if the state cannot manage its own money. And it should not be the federal government's responsibility to bail the states out. The state is your company just as a company is mine. Why should the state not have the ability to restructure? By saying what you say, you are essentially following union principles in that if you do not get what you want, then everyone should go down with the ship. I wold hate to be in your shoes if Alabama did go bankrupt. But in order for the state to survive, they would need some recourse. It might end up poorly for you.But how wold that differ from all of the folks that lost money from their company in the same situation? It is a reality that we all may face at some time or another.  What make state employees different?

Maybe we should allow other states to buy the failed state. That way they would still have to take on the debt, but they would govern more land and people. Hmmm.

I'm from Alassippi. Where you from?

Well, I'm from Tenntucky.

How many companies have you worked for that forced you to contribute to your 401k? 

[Token]

Before I get caught up in a long drawn out conversation that isn't likely to take place anyway, I'll say this.  I'll have my 25 years in when I am 52 years old.  If the retirement that I'm forced to pay on top of all the other taxes I pay isn't where it's supposed to be, I'll spend the last 10 years of my service getting my retirement from elsewhere by whatever means necessary. 

[CCTAU]

How many companies have you worked for that forced you to contribute to your 401k?

401K is not company affiliated.

If my company had a mandatory retirement contribution, then I would know that before taking the job and would have to accept the consequences, good or bad. You were not forced either. It was a condition of your employment. Your VOLUNTARY employment.

[Token]

401K is not company affiliated.

If my company had a mandatory retirement contribution, then I would know that before taking the job and would have to accept the consequences, good or bad. You were not forced either. It was a condition of your employment. Your VOLUNTARY employment.

I agree.  And for the record, I'll face no bad consequences.  I'll enjoy my retirement either way. 

[CCTAU]

I agree.  And for the record, I'll face no bad consequences.  I'll enjoy my retirement either way.

I like that attitude. where there's a will, there's a way to quietly market certain moneymaking products.

Can a bet a medium sized bottle of LOC?

[AUTiger1]

You should be investing in your own retirement. 

[RWS]

401K is not company affiliated.

If my company had a mandatory retirement contribution, then I would know that before taking the job and would have to accept the consequences, good or bad. You were not forced either. It was a condition of your employment. Your VOLUNTARY employment.

Well, shit. I guess nobody in this country has a right to complain about anything. Everybody, stop complaining about the president. Stop complaining about politicians. Quit complaining about taxes, Obamacare, etc. You're a VOLUNTARY resident of this country. Nobody is forcing you to live here. You don't have the right to be upset about anything. If you don't like it, just move out of the country. It's your choice to live in the United States.

I guess I should just quit my job and live off of the taxpayers for the rest of my days. All state employees should do the same. Things would run much smoother then. What a bunch of idiots we are for taking a job and contributing 5% of each of our checks for 25 years for the state to invest and the people to benefit from, and then expecting the state to return our investment like they guarantee. All breach of contract civil cases in the court system should just be thrown out right now, because nobody forced those people to sign contracts.

[CCTAU]

We all expect a return on our investment, but not all of us trust the gubment to do it. We all realize that bad things happen and we could lose it all. But since you invested with the state, I guess then it is all of our duties to make sure you get yours even if we do not get ours. Typical.

You might find it a little odd that if the state goes belly up, there may not be anything for you. But if they are allowed to act as a company and use the bankruptcy laws, there might just be something left.

I guess when you rely on the state, you also feel the fed should back you up.

And yes, living in this country is voluntary. But citizens have the ability to change things through voting. Like I said, you were not forced to take that job and you are not forced to keep it. If you don't like the fact that you are forced to pay into the state retirement fund, then change jobs. But if you continue and the state actually does fail, where do you think you will get your money?
Hopefully not from the rest of us.

[RWS]

We all expect a return on our investment, but not all of us trust the gubment to do it. We all realize that bad things happen and we could lose it all. But since you invested with the state, I guess then it is all of our duties to make sure you get yours even if we do not get ours. Typical.

You might find it a little odd that if the state goes belly up, there may not be anything for you. But if they are allowed to act as a company and use the bankruptcy laws, there might just be something left.

I guess when you rely on the state, you also feel the fed should back you up.

And yes, living in this country is voluntary. But citizens have the ability to change things through voting. Like I said, you were not forced to take that job and you are not forced to keep it. If you don't like the fact that you are forced to pay into the state retirement fund, then change jobs. But if you continue and the state actually does fail, where do you think you will get your money?
Hopefully not from the rest of us.

Let's be realistic. If states could file bankruptcy, and Alabama did so, I really don't think they would fuck the retirement system. I think we both know that if they dicked a bunch of state retirees, and all state employees, nobody would make it past their current term. RSA is self sustaining. But basically, what you're saying is, nobody who actually cares about their retirement should work for the state. But, for that matter, my retirement is more secure than if I worked somewhere else and invested it into a 401(k) account. So, how is going to work somewhere else and investing retirement money into something else any more responsible? It seems as if you are suggesting the only thing any of us should do is keep a stash of cash under our mattresses, and that is the only logical solution.

Part of the reason why the state offers such awesome retirement and health benefits to employees is to attract outstanding employees. Which, again, benefits the citizens of the state. They don't do it just to be nice, or because it's really cheap for them to do. There is something in it for the state as well. It is mutually beneficial to both parties.

[CCTAU]

Part of the reason why the state offers such awesome retirement and health benefits to employees is to attract outstanding employees.

Fixed that for you.

I do not agree the state would not touch the retirement system, I would not want them too. But politicians will steal money from wherever they can, damn the consequences. Just look at SSI and see that it did not ruin any political lives when they used to do it.
But as it stands right now, there is no way for the states to save themselves. They must rely on the federal government to fo it. The biggest argument against allowing this is the retirement systems, that opponents of this measure,  say will get dropped.

Did you read the article? Allowing this would allow for the states to be able to renegotiate contracts and deals that could save the state. It is the same tool that companies use to avoid total bankruptcy. To not allow the states to have recourse, is saying that all of us, not matter what state we live in, will be responsible for all states. and it gives no state incentive to but spending because eventually the fed will bail them out.

[RWS]

Fixed that for you.

I do not agree the state would not touch the retirement system, I would not want them too. But politicians will steal money from wherever they can, damn the consequences. Just look at SSI and see that it did not ruin any political lives when they used to do it.
But as it stands right now, there is no way for the states to save themselves. They must rely on the federal government to fo it. The biggest argument against allowing this is the retirement systems, that opponents of this measure,  say will get dropped.

Did you read the article? Allowing this would allow for the states to be able to renegotiate contracts and deals that could save the state. It is the same tool that companies use to avoid total bankruptcy. To not allow the states to have recourse, is saying that all of us, not matter what state we live in, will be responsible for all states. and it gives no state incentive to but spending because eventually the fed will bail them out.

Whether the state actually attracts outstanding employees or not is certainly up for debate. However, that is the intention of the state offering what it does to employees. Also, the difference in RSA and SSI, is RSA affects a smaller, localized, more concentrated population. Much easier to organize, and much less diluted by people who don't have a dog in the fight, and much easier to influence the rest of the concentrated population.

The problem with allowing states to file bankruptcy, while comparing them to private citizens and companies, is that private citizens and companies are in whatever they in for the sole benefit of making a profit. Governments are held to a higher standard. While the government is also expected to make a profit, they are also for the people, by the people. Comparing a state government to a private company is apples to oranges, in some ways. Why do you think people bitch about the deficit? In some senses, you can't operate a government like a private company. In some senses, you can. If we allow states to file for bankruptcy, that is opening a Pandora's Box full of shit. Whether they decided to rob RSA to bail them out or not, it's going to be bad for you and me both. Allowing states to file for bankruptcy is going to cause cataclysmic collapses of both the private and public sector around the country, and as a country, shit is going to get way worse. 

[GH2001]

Whether the state actually attracts outstanding employees or not is certainly up for debate. However, that is the intention of the state offering what it does to employees. Also, the difference in RSA and SSI, is RSA affects a smaller, localized, more concentrated population. Much easier to organize, and much less diluted by people who don't have a dog in the fight, and much easier to influence the rest of the concentrated population.

The problem with allowing states to file bankruptcy, while comparing them to private citizens and companies, is that private citizens and companies are in whatever they in for the sole benefit of making a profit. Governments are held to a higher standard. While the government is also expected to make a profit, they are also for the people, by the people. Comparing a state government to a private company is apples to oranges, in some ways. Why do you think people bitch about the deficit? In some senses, you can't operate a government like a private company. In some senses, you can. If we allow states to file for bankruptcy, that is opening a Pandora's Box full of shit. Whether they decided to rob RSA to bail them out or not, it's going to be bad for you and me both. Allowing states to file for bankruptcy is going to cause cataclysmic collapses of both the private and public sector around the country, and as a country, shit is going to get way worse.

Private sector always outperforms govt entities.....because they have to in order to make a profit. I.e. the post office versus UPS or FedEx. Holy shit. UPS is on it. The people at usps act like they could give 2 flying turds where you go with your business. They also lose money out the ass every year. And they care less. The govt will just print/borrow more money. Efficiency I tell ya.

[CCTAU]

Whether the state actually attracts outstanding employees or not is certainly up for debate.

Sorry. that part was in jest.


Most states have in their constitution that they must operate on a balanced budget. Even with that, when the economy changes and the value of certain things change, the state is still tied to whatever losing contract theynow have, with no recourse. Enough of these and state will fail. If states are allowed to have some sort of bankruptcy protection, they can renegotiate these contracts and deals that were made at better times. The only alternative is to let them fail. Then you will see your shitstorm. Not from new bankruptcy laws.