Bankruptcy Considered for States
January 21st, 2011How much longer can appearances be maintained? Will people continue to believe the U.S. is solvent if large states start to pack it in?
Remember Meredith Whitney in States Will Need Federal Bailout Within a Year? There was a lot of scorn directed at her after that.
Well…
Via: New York Times:
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.
Strange how bonus contracts at the time of the bail-out for the banks could not be broken because of contract law, but breaking contracts with retirees is being considered.
The government could have told Goldman that the contracts have to be broken because of national security issues (why not – it would have been true). It seems that certain officials may need a corporate favour when they leave office – talk about conflict of interest and downright fraud!