Posted on 11/28/2010 11:29:28 PM PST by goldstategop
We won't be able to say we weren't warned. Continued huge federal budget deficits will eventually mean huge increases in government borrowing costs, Erskine Bowles, co-chairman of Barack Obama's deficit reduction commission, predicted this month. "The markets will come. They will be swift, and they will be severe, and this country will never be the same."
Bowles is talking about what the business press calls bond market vigilantes. People with capital are currently willing to loan money to the federal government, by buying U.S. bonds at low interest rates. That's because interest rates are generally low and because Treasury bonds are regarded as the safest investment in the world.
But what if they aren't? What if investors suddenly perceive a higher risk and demand a higher return? That's what Bowles is talking about, and there are signs it may be starting to happen. The Federal Reserve's second round of quantitative easing -- QE2 -- was intended to lower the interest rate on long-term bonds. Instead, the rate has been going up.
The federal government still seems a long way from the disaster Bowles envisions. But some state governments aren't.
California Gov. Arnold Schwarzenegger came to Washington earlier this year to get $7 billion for his state government, which resorted to paying off vendors with scrip and delaying state income tax refunds. Illinois seems to be in even worse shape. A recent credit rating showed it weaker than Iceland and only slightly stronger than Iraq.
It's no mystery why these state governments -- and those of New York and New Jersey, as well -- are in such bad fiscal shape. These are the parts of America where the public employee unions have been calling the shots, insisting on expanded payrolls, ever higher pay, hugely generous fringe benefits and utterly unsustainable pension promises.
The prospect is that the bond market will quit financing California and Illinois long before the federal government. It may already be happening. Earlier this month, California could sell only $6 billion of $10 billion revenue anticipation notes it put on the market.
Individual investors have been selling off state and local municipal bonds this month. Meredith Whitney, the financial expert who first spotted Citigroup's overexposure to mortgage-backed securities, is now predicting a sell-off in the municipal bond market.
So it's entirely possible that some state government -- California and Illinois, facing $25 billion and $15 billion deficits, are likely suspects -- will be coming to Washington some time in the next two years in search of a bailout. The Obama administration may be sympathetic. It's channeled stimulus money to states and TARP money to General Motors and Chrysler in large part to bail out its labor union allies.
But the Republican House is not likely to share that view, and it's hard to see how tapped-out state governments can get 60 votes in a 53-47 Democratic Senate.
How to avoid this scenario? University of Pennsylvania law professor David Skeel, writing in The Weekly Standard, suggests that Congress pass a law allowing states to go bankrupt.
Skeel, a bankruptcy expert, notes that a Depression-era statute allows local governments to go into bankruptcy. Some have done so: Orange County, Calif., in 1994, Vallejo, Calif., in 2008. Others -- perhaps a dozen small municipalities in Michigan -- are headed that way.
A state bankruptcy law would not let creditors thrust a state into bankruptcy -- that would violate state sovereignty. But it would allow a state government going into bankruptcy to force a "cram down," imposing a haircut on bondholders, and to rewrite its union contracts.
The threat of bankruptcy would put a powerful weapon in the hands of governors and legislatures: They can tell their unions that they have to accept cuts now or face a much more dire fate in bankruptcy court.
It's not clear that governors like California's Jerry Brown, who first authorized public employee unions in the 1970s, or Illinois's Pat Quinn will be eager to use such a threat against unions, which have been the Democratic Party's longtime allies and financiers.
But the bond market could force their hand and seems already to be pushing in that direction. And, as Bowles notes, when the markets come, they will be swift and severe.
The policy arguments for a bailout of California or Illinois public employee union members are incredibly weak. If Congress allows state bankruptcies, it might prevent a crisis that is plainly looming.
States can’t sue for bankruptcy but if a federal law allowed them to do so, federal bankruptcy provisions would take precedence over state laws that forbid revocation of union contracts. In our federal system, bankruptcy law is a federal matter and is uniform throughout the country.
Someone is left holding the bag.
It will be union members. I don’t see a tax increase proposal to pay for their enhanced benefits passing muster with struggling voters.
Forget it.
I doubt that a revision/extension to the US bankruptcy code to allow states to go BK would go through in the current political environment.
The idea is flawed, IMO. States are political sovereigns, and they have the power to either raise taxes or fix their budgets. Allowing them to default on their state debts puts the issue of taxes and spending into the bankruptcy courts’ laps, and that’s not a place we want to see state spending and taxation go.
The states will have to grow a pair and address their issues. This is why the new governor of NJ is attracting so much attention - because he grew a pair and decided to take the issues on without flinching, without apology and without delay.
Maybe.
It is Obamaland. The whole world is upside down. :(
I’m talking about the outstanding debt instruments which certainly have not been redeemed. Think about all those tax exempt mutual funds.
C’mon... Blue State governors won’t do it. So we need to give them a tool to force changes at home. The unions can restructure pensions or let a federal judge make the changes. I think they’ll be mote receptive to what’s needed if they consent to those changes than having it imposed on them by a federal court.
The problem is it is impossible to make a distinction in bankruptcy proceedings between pensions that run to firefighters and police and pensions that run to school administrators, city officials, and building inspectors the like of which we have seen in Bell California.
Then it is up to the voters to deal with the problem(s).
If the voters leave the idiots in office, well then, they get what they deserve.
Currently, there is no provision for a state to declare bankruptcy.
Unlike corporate BK, I seriously doubt that any additional provisions added to allow creditors to a state to force it into BK. The state’s officers would have to make the application to the court. Well, they’re not going to do that, because doing so will take the power over spending/taxation out of the hands of elected officials and hand said power over to the BK courts.
So if Blue State governors aren’t about to take on the spending issues, they’re NOT about to hand those issues over to a court.
Then it is up to the voters to deal with the problem(s).
If the voters leave the idiots in office, well then, they get what they deserve.
Currently, there is no provision for a state to declare bankruptcy.
Unlike corporate BK, I seriously doubt that any additional provisions added to allow creditors to a state to force it into BK. The state’s officers would have to make the application to the court. Well, they’re not going to do that, because doing so will take the power over spending/taxation out of the hands of elected officials and hand said power over to the BK courts.
So if Blue State governors aren’t about to take on the spending issues, they’re NOT about to hand those issues over to a court.
If they hand over those issues, they can claim they were forced to do it by the courts - if by that you mean cut spending, void union contracts, impose austerity, etc. They’re certainly not going to do it themselves because the threat of political retaliation hangs heavily over their heads.
Judges have ordered elected officials to raise taxes in the past. This has happened in places like Missouri and Vermont over school funding.
Now, the ability of courts to make these orders has been constrained somewhat by Missouri v. Jenkins (1995), but I don’t doubt that in a BK court, that ruling would be seen as non-applicable. There is no legal precedent for a judge to feel constrained to NOT be able to order a state legislature to “do their job and raise taxes,” especially when the judge starts citing duties of the state to a) educate children and b) pay their creditors, which are enshrined in some state constitutions. A judge would be on solid ground in a state-level BK proceeding to tell the legislature to raise taxes to discharge these two duties...
No claim that “they were forced to do so” will withstand even marginal scrutiny. First of all, let’s assume that a state could file BK. No court is forcing a state executive or legislature to file BK. The state’s governor and legislature would be (rightly) seen as ducking their responsibilities and dumping it all into the lap of a BK judge.
Then, once in BK, the judge could dump it right back on them: A state is a political sovereign, with the powers to tax, issue debt, negotiate contracts and so on. Our court system hasn’t allowed states to file BK in the past, because states do have these powers. The legislature and executive have all the powers they need to avoid filing BK. A court could well order the legislature and governor of a state to “do YOUR job,” and leave it at that. Again, the state’s political leadership has all the tools at their disposal to handle these issues. The fact that they’re going to face the wrath of the voters or special interest groups for making hard choices is no concern of the court’s.
There is no easy path out here through state-level bankruptcy.
A judge cannot appropriate money or order the other branches of government to do anything. He can hold them in contempt but they can just ignore his order and no judge has the power to order officials to be arrested for defiance if they don’t care for the court’s ruling. So what the court can do is limited.
Bankruptcy voids all prior debts and obligations and wipes the slate clean. Hopefully, a state will make more rational choices the next time around. A lot of interest groups and voters would be unhappy but think how unhappy they would be if they could no longer be provided with any entitlements due to lack of money.
I’m talking reality. You’re talking theory. About $1.25 and your theory might get you a cup of coffee in many diners.
The reality is that taxes in Missouri and Vermont were raised at the order of a judge to pay for rectifying educational “inequality.” The reality is that this situation in Missouri went to the SCOTUS and was knocked back, but Vermont’s tax increases came about after Missouri v. Jenkins.
The reality is that the Nevada Supreme Court declared that the two-thirds vote requirement to be unconstitutional (ie, they declared part of the Nevada state constitution to be “unconstitutional” - a feat of logic I’ve not seen duplicated yet) and directed the NV legislature to vote on tax increases again to cover educational costs in the state budget.
That’s reality.
Get back to me when someone on a court dressed in drag respects a constitution, state or otherwise.
The facts of the matter are this: A state that files BK will have to deal with the creditors. The creditors will be allowed for form a committee to advise the BK court of their interests. If said committee refuses to take a haircut, then the court will issue a writ of mandamus to the legislature telling them that a) they have the power to raise taxes, and b) they have a duty to raise taxes, so c) get on with raising the revenue to service the creditors.
NY, CA and ILL will not “grow a pair” with their current Democratic governors. The bill collector will arrive long before another election.
What will happen is that they will become “deadbeat states”, obligated on paper to pay a lot of bills but without the cash to do so.
Welcome to the new normal.
(If you are doing business with one of these states you need to demand cash on delivery or find other markets—these three states just flunked their credit check.)
Grab the popcorn to see which bills they decide to pay in what order.
Suppose a judge says you must pick up your house and move it a mile down the road. Will you do it? can you do it? In the case of the towns or States this “judge” decrees must continue to honor the very contracts which drove it to insolvency, how exactly would the States accomplish this. Where does the money come from? And when the State stops paying the union contracts because there is ZERO money to do so, what will the “judge” do then?
Some one once commented on a Supreme Court decision years and years ago saying (paraphrased), “Ok, they have issued a ruling, know let’s see them enforce it” and another one which goes, “How many divisions does the Supreme Court have to enforce the decision”?
Bills cannot be paid with no money and taxes cannot be continually raised without causing the economic activity from which the tax is taken to shrink. It’s the case of diminishing and then of negative returns.
Not even close.
A municipality cannot file a Chapter 7 (which is what you’re talking about) personal BK. Only a Chapter 7 BK voids all prior debts as part of the liquidation of the bankrupt party’s estate. A Chapter 13 BK restructures personal debt. A corporation can’t stroll away from their debts; filings for corporate BK are done under Chapter 11, which is a re-organization of debt, not an absolution or discharge of all debt. Chapter 12 is open to only farmers, ranchers and fishermen, so we needn’t discuss that here.
Chapters 7, 11, 12 and 13 don’t apply to municipalities, who can file under only Chapter 9.
A town, city, county or other municipal sovereign (which can include things like “improvement districts,” “irrigation districts,” etc) can file only a Chapter 9 pleading, only if allowed to do so by their state, and only to restructure their obligations.
They can’t be forced into filing by their creditors. They DON’T get to walk away with a clean slate. There is no chapter of the US bankruptcy code allowing for a state to file BK at all, and if (and that’s a huge IF) such a chapter were ever added, it would be modeled on the Chapter 9 provisions.
One of the things different about Chapter 9 vs. the other chapters of Title 11 USC is that the physical assets of the municipality are NOT considered as part of the balance sheet by creditors in the proceeding. In other words, creditors cannot make a municipality sell off the city parts for real estate to discharge their debts (eg). A BK court has to perform extensive cash flow analysis to see what of the obligations may be serviced by the revenue stream and go from there.
Contracts with public employees *might* be open to adjustment, but at the same time, said public employees enjoy an equal seat at the table with creditors to the municipality filing Chapter 9. There is nothing in Chapter 9 that gets creditors preferential treatment over employees.
That’s all very true.
Now show me a legislature anywhere in the US with the balls to tell a court to go screw themselves.
Anywhere. Any state. Just show me one.
I had hoped that Nevada’s legislature would tell the NV Supreme Court to go screw themselves when they issued their ruling that the requirement of a two-thirds vote to raise taxes in the NV State Constitution was invalid, but even they backed down.
Until and unless a legislature is willing to tell a court to piss off, and then back that up (ultimately) with political power emanating from the barrel of a gun, the courts will continue to enjoy their power.
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