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Is bankruptcy off the table?

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Illinois

House Majority Leader Eric Cantor said Monday that he opposes changing the law to allow fiscally pressed states to seek bankruptcy protection, an idea that has been raised by some conservatives.

Speaking to reporters, Cantor (R-Va.) also said state governments should not expect Washington to solve their fiscal problems. States have the ability to balance their books by cutting spending, raising taxes or renegotiating agreements with labor unions, he said.

While the feds should’ve given more money to states via the stimulus bill, they shouldn’t compound the problem now by allowing states to declare bankruptcy (if they even can, which is debatable).

The municipal bond market has been built on the notion that states have to pay off their bondholders. A bankruptcy option would mean the entire market would have to be rebuilt and restructured. Chaos would surely result. Imagine trying to sell a 20-year infrastructure bond when the buyers know the states could just declare bankruptcy at any moment and absolve themselves from the debt. Yes, there is that risk with corporate bonds, but the market was built with that in mind. Not so with munis.

* One reason this is being pushed is to allow states to break union contracts. But a state can pass a law to outlaw collective bargaining for public employees. It won’t kill off current union contracts, but it would preclude further contracts. That’s under discussion in Wisconsin right now.

* Another reason given is that states could perhaps get out of their pension obligations…

Kirk says the only legal options available now for states such as Illinois are default – which could be devastating – or a federal bailout.

“Between a bailout, which has no possibility of passing in the House, and a default, which means suddenly, the state treasury runs out of money to pay for anything, is there something that allows a state work out its debt situation?” Kirk said.

Bankruptcy would allow the state to restructure its pension system so that it may preserve benefits for existing employees.

Strangely enough, he said that after Illinois approved a tax hike. Apparently, he doesn’t see that as an option, nor does he see severe budget cutting as an option.

New Jersey, which didn’t really cut anything despite promises to the contrary, is planning to skip its pension payment for the second year in a row. Texas will skip most of its payment in the coming year. But federal bankruptcy judges could force draconian cuts or maybe even a tax hike. One never knows.

* And that’s really the heart of the matter here. Conservatives screamed bloody murder for decades about federal judicial takeovers of school districts. Now they want to hand over entire state budgets to unelected judges? Really?

There are those on the Left who believe that what’s really going on here is that the people behind this bankruptcy push want to save newly elected Republican governors from the political nightmare of having to make the hard choices on their promised cuts. That would be typical DC, and it would be just like DC to ignore decades of hard and fast positions in order to score a short-term political gain.

* Bob Dole once said this about Newt Gingrich…

“You hear Gingrich’s staff has these five file cabinets, four big ones and one little tiny one. Number one is `Newt’s Ideas.’ Number two, `Newt’s Ideas.’ Number three, number four–`Newt’s Ideas.’ The little one is `Newt’s Good Ideas.’”

Gingrich has been pushing this state bankruptcy idea for months. It certainly doesn’t belong in the little cabinet.

posted by Rich Miller
Tuesday, Jan 25, 11 @ 11:30 am

Comments

Trying to use the bankruptcy courts as a substitute for lawmakers doing their jobs is completely irresponsible.

But it would be par for the course for the feckless people we have working for us in Springfield.

Comment by just sayin' Tuesday, Jan 25, 11 @ 11:34 am
js, this is a federal proposal, not a Statehouse proposal.

Comment by Rich Miller Tuesday, Jan 25, 11 @ 11:40 am
A lot of these budget problems could have been avoided if Stimulus funds were block granted to the states instead of reinforcing bloated government by having strings attached that caused increased state government spending in order to qualify for the funds (e.g. high speed rail). I think we’d be in much better shape of Governors were allowed to spend the Stimulus as they saw fit instead of as dictated by DC bureaucrats. Maybe not here in Illinois, but in many other states.

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 11:51 am
==But a state can pass a law to outlaw collective bargaining for public employees==

Glad to see you make this point. I would say that public-sector unions are a necessary evil and should not be eliminated. At least they provide a balance that keeps management from going off the deep end. But the employer has the power to set the rules. In the Federal government, unions can’t bargain pay and benefits. The state should also scale back some of the rights given to the unions. Benefit cuts are not the whole solution, but they need to be one part of a solution that will have to hurt all the way around if it’s going to work.

Comment by Excessively Rabid Tuesday, Jan 25, 11 @ 11:53 am
For decades politicians (on both sides) have been avoiding their financial obligations while spending more than what was coming in. Now the debt load is overwhelming.

As Rich has pointed out, Bankruptcy would be catastrophic.

To get out of this mess, they need to spend less and take in more, creating a surplus to slowly reducing the debt over a number of years. The trouble is, with today’s politicians , I don’t see this happening.

They may hope for more federal money… but the fed has its own problem with its own debt.

A high dose of inflation is the only way I see out of this mess… and that is going to hurt a lot of people.

Comment by Rufus Tuesday, Jan 25, 11 @ 11:53 am
So much for promoting “fiscal responsibility.” What incentive would there be to balance the budget when you can always sneak out the bankruptcy back door? Since legislatures love to kick the can down the road, this would be too tempting.

Comment by Pot calling kettle Tuesday, Jan 25, 11 @ 12:07 pm
I argue here neither for nor against bankruptcy protections for state governments. I only want to point out a few statistics.

Chicago population 2.9M

States having population equal or less than Chicago:

MS
AR
KS
UT
NV
NM
WV
NE
ID
HI
ME
NH
RI
MT
DE
SD
AK
ND
VT
WY

How did the bankruptcy code so evolve to allow government entities the size of Chicago to declare insolvency, while denying that same protection to 40% of the states whose governments represent the same (or less) number of citizens?

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 12:09 pm
I am a conservative.
I am against allowing bankruptcy.
I am opposed to another bailout because we are broke.

Either cut or increase taxes. Either negociate with AFSCME well, or hire someone to do a good job negociating. Respect contract laws.

Do not lump all conservatives into a political conspiracy. Most of the folks I know are too cynical to sacrifice our convictions for a politician regardless of party.

Bankruptcy was considered and was a no go. The challenges are enough without injecting politics into it. We need results and open minds, not conspiratorial theories.

Injecting politics into brainstorming ruins everything. It shuts down dialog. It trivializes any results.

Everyone means well. The stakes are high. Sometimes good ideas come from unlikely people. Especially if you mock them whenever you can. If you are mocking, you are not listening.

Comment by VanillaMan Tuesday, Jan 25, 11 @ 12:10 pm
But Illinois still has moral bankruptcy as an option, right?

– MrJM

Comment by MrJM Tuesday, Jan 25, 11 @ 12:24 pm
MrJM - Always has, always will!!

Comment by WhoKnew Tuesday, Jan 25, 11 @ 12:30 pm
The big bankruptcy law firms will be very disappointed. I can only imagine what a gold mine that would be for both the creditors and debtors counsel. Years of billables and hearings…

Comment by Anon3 Tuesday, Jan 25, 11 @ 12:31 pm
“But federal bankruptcy judges could force draconian cuts or maybe even a tax hike.”

Agreed.

Why would a judge restructure a contract when there are other means available?

Comment by MikeMacD Tuesday, Jan 25, 11 @ 12:33 pm
Cincinnatus - I may be wrong in how I’m interpreting what you’re saying, but I think your point is that cities (i.e., Chicago) can declare bankruptcy, while states can’t? That’s not necessarily true, although in some states it is. Cities are potentially allowed to declare bankruptcy under the federal bankruptcy code, but as divisions of “sovereign” entities, only if the state allows them to do so by state law. The Illinois General Assembly has not given cities here that right, so towns in Illinois can’t declare bankruptcy. As I understand it, the sovereignity issue is why states weren’t previously included in the bankruptcy code (I’m a little foggier on that point, though).

Comment by Katiedid Tuesday, Jan 25, 11 @ 12:37 pm
I didn’t think there would be any way the Feds would work to allow sovereign states the ability to declare bankruptcy. The real question now is, 1.) Can a pension fund declare bankruptcy?, and 2.) Is the state liable if said pension fund declares bankruptcy?

Comment by Nagidam Tuesday, Jan 25, 11 @ 12:39 pm
If any state in the union is allowed to go bankrupt. The other states legislatures should by a 3/4 vote add an amendment to the US constitution. No elected federal official past or present will receive a pension or benefits after leaving said office. That congress shall pass no laws that exempts congress from the law.

Comment by BOB Tuesday, Jan 25, 11 @ 12:54 pm
Thanks, Katiedid for the analysis.

Katiedid said.

“I’m a little foggier on that point, though.”

Hopefully, you aren’t pettifoggier!

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 12:55 pm
Does anyone know why Sen. Kirk seems to be promoting this idea? I know from reliable sources that he has met with at least one local government body and told them that Illinois is being “targeted” for bankruptcy. Why would he do that?

Comment by girlawyer Tuesday, Jan 25, 11 @ 12:55 pm
===cities (i.e., Chicago) can declare bankruptcy===

Chicago can’t declare bankruptcy because Illinois law doesn’t allow it.

Also, Cincy, you need to brush up on your federalism.

Comment by Rich Miller Tuesday, Jan 25, 11 @ 12:55 pm
I think allowing states to declare bankruptcy is a horrible idea. The point on the muni bonds is well made, as is the point of having judges take over a state’s budget and contracts. I hate taxe hikes, but I take that over not honoring our obligations no contest. The moral hazard involved in allowing such complete failure from our government and our elected officials is mind-boggling.

Comment by Liandro Tuesday, Jan 25, 11 @ 12:57 pm
Rich,

Laws on bankruptcy are a Congressional Constitutional prerogative.

Comment by Cincinnatus Tuesday, Jan 25, 11 @ 1:05 pm
Cincy, we just had a recent Illinois case involving an IL municipality seeking federal bankruptcy protection. It was denied because Illinois law doesn’t permit it.

Also, they can change the constitution if they want, but Illinois would almost surely have to change its own if it wanted to take advantage of bankrupcty laws. And that would require citizen approval.

Comment by Rich Miller Tuesday, Jan 25, 11 @ 1:07 pm
Rich - I think we’re saying the same thing. The part of my post that you quoted wasn’t me saying that cities in IL can declare BK; I was repeating what I thought Cincy was saying, which I then corrected to make the same point you are.

Comment by Katiedid Tuesday, Jan 25, 11 @ 1:16 pm
What would life be like in Illinois if it was allowed to go bankrupt? Its borrowing costs would sky rocket, assuming anyone was foolish enough to loan it money ever again. Every business would insist on payment COD. Taxes at all levels would become unbearably high because the option of prudent long term borrowing in lieu of higher taxes would be gone. A state bankruptcy could trigger population outflow, especially of the brightest and the wealthiest, which could trigger a death spiral. And what would Illinois be afterwards? A commonwealth? A territory? Surely, in practice, it would no longer be a sovereign. That Sen. Kirk publicly entertained this notion shows a serious lack of judgement. The out on government employee pensions is bare knuckled negotiation and brinksmanship, including lengthy court fights to test the full reach of the Il constitution’s protection of them and the executive’s power to recast them. It’ll be messy and time consuming, but essential. Illinois legislators created this mess, and now it’s up to them to fix it, instead of looking to DC for chemotherapy which certainly will kill the patient.

Comment by Cook County Commoner Tuesday, Jan 25, 11 @ 1:33 pm
Treasurer Rutherford was on CNBC getting grilled on this topic this morning: http://www.cnbc.com/id/15840232?video=1765631922&play=1

He does not support bankruptcy. It’s worth a watch.

Comment by Pot calling kettle Tuesday, Jan 25, 11 @ 2:59 pm
==“Between a bailout, which has no possibility of passing in the House, and a default, which means suddenly, the state treasury runs out of money to pay for anything, is there something that allows a state work out its debt situation?” Kirk said.==

What in the world is Kirk talking about? Did he get a concussion fighting in Afghanistan in “Ironman III?”

How about paying the debt (what a concept)? You do that by cutting expenditures, raising revenues, as the SOI is doing now, plus a component of borrowing, which some are proposing.

State bankruptcy? Have these folks gone nuts? Our problems now are bigger than those in previous recessions, or the Civil War, Depression and WWII. Cowboy up, Senator.

Bankruptcy protection for private investment, along with incorporation, are necessary tools of capitalism so folks can assume risk with the knowledge that one bad move, or stroke of luck, won’t ruin their existence on this planet.

Sovereign states are going concerns. You cut, you raise revenue, you live to fight another day.

Newt, Cornyn and some of these other alleged “conservatives” pushing this insane nonsense just want to bust public employee unions.

Comment by wordslinger Tuesday, Jan 25, 11 @ 3:13 pm
At the risk of being overly-nostalgic, does anyone else remember when the thought of a personal bankruptcy was about the most shameful thing imaginable?

Of course, bankruptcy was the solution to debtors’ prisons, and while I’m not pining for a return to the old good old days, it just seems like now people get in over their heads and shrug it off in BK court. No big deal. Wait seven years and start it all over again.

It used to be, if you borrowed money, you paid it back. If you didn’t, your friends turned their backs on you. Now, not so much.

Clip and save that Kirk comment though. That might come in handy in five years or so. What a maroon.

Comment by 47th Ward Tuesday, Jan 25, 11 @ 4:16 pm
–The state’s and its subjurisdiction’s debts, including pension obligations, are too massive to offset with any combination of spending cuts and tax increases. They simply won’t be paid whether its through bankruptcy, default, or renegotiation. Mark Kirk is right.–

Says you.

I’m with 47. Bankruptcy was, and in most cases should be, a horrible setback that you have to rebuild from.

Again, in the private sector, bankruptcy and incorporation allow individuals to take risks that drive the economy. The concept is ridiculous when applied to state governments.

You pay your bills. If you can’t swing it, you cut, get more revenue, borrow or try to re-negotiate. You muddle through, like every society has since the crust cooled.

I’m flabbergasted by proponents of this snake oil. Are you saying this is the generation of Americans that doesn’t have the guts to cut it anymore? Speak for yourself.

Comment by wordslinger Tuesday, Jan 25, 11 @ 4:43 pm
What is the price of a state bankruptcy? How many tens of thousands of company and organizational vendor bankruptcies would follow, followed immediately by ten times as many individual bankruptcies with the continuing spiral to the local retail/service area. Only ones who would be doing well would be bankruptcy attorneys. The rest, crash on the rocks.

Comment by zatoichi Tuesday, Jan 25, 11 @ 5:42 pm
–(Reuters) - Senate Republican leaders said on Tuesday they were considering introducing legislation to allow financially stressed U.S. states to declare bankruptcy, even though the No. 2 Republican in the House of Representatives has rebuffed the idea.

“We’re exploring that as a responsible option,” Senator John Cornyn, who sits on both the Budget and Finance committees, told reporters.–

–(Reuters) - Legislation that would allow U.S. states to file for bankruptcy will likely be introduced in Congress within the next month, Newt Gingrich, the former speaker of the House of Representatives and a powerful Republican party figure, told Reuters on Friday.–

Katie bar the door. Save us from “responsible conservatives” like Cornyn and Gingrich.

They all must have short positions in the muni bond market.

Comment by wordslinger Tuesday, Jan 25, 11 @ 6:40 pm
This is so incredibly irresponsible from a fiscal stand point that it makes me wonder where these people came from. Do they think their backers on Wall Street and in big business will support this? That’s who the states owe money to. Have they gotten into Limbaugh’s OxyContin stash?

Comment by Pot calling kettle Tuesday, Jan 25, 11 @ 7:21 pm
I am shocked the Kirk would say something so irresponsible. Then again, I was shocked that somebody in that position would lie about his service record. I guess I better adopt an attitude not to be shocked by Kirk pandering to anybody, including those who want to wreck government altogether.

Comment by jake Tuesday, Jan 25, 11 @ 8:23 pm
I don’t think it really ever has been on the table, except in the minds of a chosen few who yet have to demonstrate that they can govern.

Comment by steve schnorf Tuesday, Jan 25, 11 @ 8:36 pm
“Chicago can’t declare bankruptcy because Illinois law would not allow it.”
The reality is that “Illinois law” is determined by Chicago so it is not a big stretch to see how this state law could be readily changed.
Mark Kirk is a realist and he has seen that the current Democrat state congress and governor “lack the will” to make the hard financial decisions for the State of Illinois. These Springfield politicians are themselves bankrupt when it comes to having the ability to govern effectively for the people in a time of financial crisis. These guys know that by doing the right thing and making the hard decisions that they may jeopardize their future electability. Self-preservation is the overriding concern of our Illinois state elected officials including our governor.

Mark Kirk knows that a radical solution must be employed to “fix that which is broken” in Illinois. He knows that our Illinois Democrat elected officials are beholden to the unions for their elections. They are not about to bite the hand that feeds them. So—-here we sit waiting for the Titanic to hit the approaching iceberg. There has to be a “middle ground” between bankruptcy and the current failure to call a duck “a duck” and to do something about it. Thank Mark Kirk for saying what many of us our thinking. Incidentally, I am not rushing out to buy municipal bonds whether in the primary or the secondaty market “no matter what their effective yield might be”. Preservation of capital is what motivates small investors at this economic point in time.

Comment by Pilgrim Wednesday, Jan 26, 11 @ 9:06 am
Pilgrim, when did Mark Kirk became interested in state budgets, particularly Illinois? I don’t recall any interest in the past, certainly not during the campaign.

His Senate website doesn’t make any mention of it (makes mention of nothing at all, really). What gives?

Comment by wordslinger Wednesday, Jan 26, 11 @ 9:12 am