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.
You know, I believe in political accountability and the states are soveriegn entities as spelled out in the U.S. Constitution. If California or Illinois have a massive insolvency problem, then the states MUST solve them.
I mean, didn’t they cause their own problems in the first place?
A few weeks ago, the Los Angeles Times posted an online state budget balance calculator for readers to attempt to balance the California budget. It took me about 3 minutes. In California, Jerry Brown, the new and former California Governor and the Democrat dominated legislature can do likewise – if they have the political will.
A California state bankruptcy would stiff retired older workers and state/city/county bond holders immediately and have other long term effects without delivering the needed political will or reforms – to say NO to excessive government spending. Bankruptcy would simply delay the enactment of appropriate budgetary solutions – like cutting spending and prioritizing government spending.
BK would simply reset the clock for the POLS.
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.
State bankruptcy is a bad idea.
If Jerry Brown cannot balance the state budget, have him call me – I’ll do it for him in about 3 minutes.
As far as an oversight panel for California, as a California voter I reject that idea. If voters don’t like what their POLS are doing, then WE THE PEOPLE will take care of the problem. If insolvency occurs, then the POLS have to go and we will elect others.
No federal bureaucrat or federal judge should be disenfranchising me or other California voters.
Just say NO to State Bankruptcy