A Path Is Sought for States to Escape Their Debt Burdens

MORALITY? ” Any fictitious entity (corporations etc.) or any person with wealth can file for relief from creditors under Chapter 11 Bankruptcy wherein the debtor stays in possession but not homeowners or consumers. Now there is a proposal coming onto the table wherein State and Local Government can go through a “form” of bankruptcy where they can eliminate or reduce their pension obligations and other annoyances, but not the borrowers who got suckered into an array of over 400 types of mortgages that appeared in the last decade.

I don’t care what you think of public pensions. We are talking about millions of people being affected here. Some of them so old they can’t feed themselves. Talk about shooting yourself in the foot, just what do they think is going to happen to the pensioners? I’ll tell you, more trips to ER, more deaths, more psychological depression as you cut loose people who COULD work but can’t get a job. This is a society that for the privilege of a few is willingly strangling itself with its bare hands.

If the Supreme Court is serious about treating corporations  the same as natural persons then they have stepped on their own anatomy. If Corporations may be allowed to invoke Chapter 11, cram-down and debtor-in-possession rules then the other kind of people (the ones that walk and talk and breath) must be allowed as well under the equal protection provisions of the U.S. Constitution — or just admit that we aren’t going to use that piece of paper anymore, we are just going to make up rules as we go along, the people be damned.

NY 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.

“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.”

19 Responses

  1. Dying Truth: Unfortunately, Michael Moore came right out and said on the Rachel Maddow show that the US has several other wars going on as well. On top of that, we have Saudia Arabia and other Arab nations asking us to take out Iran and its nuclear program. Well, if we are going to be mercenaries, then they can pay us to wage war.

  2. To Gregory Bryl ESQ,

    Hopefully you will help, I’m in Ca with a TILA claim not responded to…What does the Satisfaction of Lein look like?

  3. PJ

    Yes — but lots more without pensions.

  4. @Neil… Amen, your words are the absolute truth!

    “I don’t care what you think of public pensions. We are talking about millions of people being affected here. Some of them so old they can’t feed themselves. Talk about shooting yourself in the foot, just what do they think is going to happen to the pensioners? I’ll tell you, more trips to ER, more deaths, more psychological depression as you cut loose people who COULD work but can’t get a job. This is a society that for the privilege of a few is willingly strangling itself with its bare hands.”

  5. leapfrog,

    Interesting post.

    Again, experts speaking today about state budget problems. The problem is that they “banked” on high interest rates from subprime mortgages that were falsely rated AAA.

    My own thought — what were the investment administrators thinking??? did they really believe that they had a “windfall” investment that was substantially above market interest rates??? Did they read the prospectus that states the debt/income ratios were high and FICO scores low??? They were provided a prospectus.

    These investors were returned their principal — problem is they cannot make up the interest rate shortfall. And, we were supposed to keep paying high interest rate so states could meet their budgets??? Do not think so.

    Experts also talked of “relocation” to states who do not tax as high as other states. Problem is — cannot sell house to move. Also stated that state/government workers earn far more than private workers (of course, let us except bank CEOs) and have far greater benefits. So — question was — can we tax the people so that they will cover state shortfalls?? Answer was – NO — people will leave — even if they have to strategically default.

    One of Nine reasons why the US economy will under perform..

    Speaker — A. Gary Schillings — some research at

  6. Dying Truth: With regards to suffering the bad decisions of government – take a look at what’s going down in Ireland, where a government canoodling in bed with the banks has saddled future generations of Irish – that is, the ones that aren’t soon leaving that country for gainful employment elsewhere – with the outrageous debts of the euro-banksters.

  7. Louise,
    “wars by borrowing from China”

    “Several years ago, I met with the Deputy Director of the Policy Planning staff of China’s Ministry of Foreign Affairs, and I asked him what he was working on — and what China’s grand strategy was.

    His reply: “We are trying to figure out how to keep you Americans distracted in small Middle Eastern countries.”

    Now for the REAL reason why we are fighting the wars….

    “In 2002 [9/11 Commission Executive Director Philip] Zelikow made remarks interpreted as alleging that the United States entered the Iraq War to protect Israel, when he said:

    “ “Why would Iraq attack America or use nuclear weapons against us? I’ll tell you what I think the real threat (is) and actually has been since 1990 — it’s the threat against Israel,” ”

    “Benjamin Netanyahu told an audience at Bar Ilan university that the September 11, 2001 terror attacks had been beneficial for Israel.”

    The Money we Borrow from China to give away to Israel…..

    “As part of his $3.8 trillion budget request to Congress for fiscal year 2011, President Obama has asked for $3 billion in military aid to Israel—a $225 million increase from fiscal year 2010.

    The president’s request reflects the third year of the 10-year, $30 billion U.S.-Israel Memorandum of Understanding.”

    “Congress vows not to cut U.S. missile defense aid to Israel

    Senior members of the House of Representatives said the new Congress would continue aid to several Israeli missile defense programs. They said the U.S. aid would include Israel’s new anti-rocket system, Iron Dome.”

  8. “Increasingly, the banks and mortgage companies, particularly on second mortgages, are not filing foreclosures but are instead just filing breach of contract claims in courts across the country to collect those debts. They don’t want the property back, but they will file suit to get a judgment against you.

    Problem is the banks have written a major problem into many of their own contracts that causes them MAJOR problems. If you read these contracts carefully, you will note they have a forum selection clause that mandates all disputes will be resolved through the American Arbitration Association. Problem for our bankster friends is the AAA no longer has this program running anymore, thus the banksters and the credit card companies cannot fulfill the terms of the contract they wrote.”

  9. FIRST STANDING-RELATED VICTORY IN VIRGINIA: Aurora’s claim to title thrown out for lack of standing!

  10. The upcoming movie of the year: The Crash of the Bond Market. As far as I am concerned, the federal government can bail out the states just like they bailed out the stinkin’ banks and the car companies.

    I know a person who is retired from the California Highway Patrol and has a pension with the biggest pension plan in the world: CALPERS. God help him. I have another friend who is retired from the Florida Court system–ditto. He has three children not of college age. He and his wife both work–she lost her job with the school system and manages a restaurant.

    I would still like to know who is the idiot(s) who came up with the idea of prosecuting wars by borrowing from China. Truly amazing–irresponsible deadbeats, obviously! Where are all the deadbeats really located?

  11. Even though being sovereign, States NOT “Too Big to Fail”, but Banks that produce nothing and leech off of the People through collecting interest charged on them and their irresponsible Governments ARE?

    Does anybody else not recognize the absolute FAILURE of Congress and D.C. to fulfill their obligations?

    This is assuredly can meet the qualified criteria of TREASON.

  12. One remedy could be for pensioners to start placing workman’s liens on STATE property in lieu of payment of the pension. States do not have sovereign immunity in a commercial contract. If someone worked for the STATE and put value into it. Attach their property I say!

  13. People need to realize that the STATE is in fact a corporation that executes a public trust.

  14. “If the Supreme Court is serious about treating corporations the same as natural persons then they have stepped on their own anatomy.”

    Seems like the Roberts’ court is about as smart as the banksters/Wall Street with their securitization/MERS schemes.

  15. But banks really don’t seem to go into “bankruptcy” – they are “taken over,” shut down,” etc. by their so-called “regulators” and then the FDIC is said to magically turn over the failed banks “assets” to some other bank per some ridiculous “loss share agreement.” The banks prefer this arrangement rather than bankrupcty because it keeps all the frauds in the dark and out of a bankruptcy courtroom. A public airing of such dirty laundry through bankruptcy is for all the other peon types of corporations and their respective creditors – not for the ruling class banksters. And then there is the benefit of being declared “too big to fail.” Lehman Bros and WAMU’s BKs seem to be exceptions the banksters would sooner avoid.

  16. I thought the sole purpose of Government being put in place was to protect the People, NOT the other way around. If sacrifice should be required anywhere, it should be with the Government that was entrusted to protect the People and FAILED!

  17. WOW, the State Governments are “Deadbeats”. Who would’ve guessed it (Me)? Well none of this is the People’s fault. We’re not the irresponsible Governments who borrowed too much. Why should we be forced to suffer for their bad decisions?

    Why should it matter any more different that Public Employee pensioners will be stripped of their means to survive like everybody else, are any of them anymore “privileged” than any of us?

  18. Seems to me that the citizens have to mount a massive campaign,including marches to stop this one. Think of the degradation of the retirees who paid their contributions for life. Also on the one hand citizens have been robbed by the private sector..(banks’s foreclosures, securitizations) , and now the government entities are about to rob the pension funds via quasi- bankruptcy. They might as well bring back serfdom. Look at how they raided Social Security funds since the 1950’s and then today claim the Fund has no money. Where is the money? If this is freedom …. then give me my wings and harp.The government entities were snookerd as well as the rest of the common man. Who, what caused all this….the banksters??? Light the bonfires!!!!!!

  19. Congress… Bank Bought Zombies….

    But First! A Little about their pimping owner… The Banker LOL

    I think what is apropos here is explaining a manmade dynamic, which of course only needed a dash of desperation to reveal the reality under the surface: The bank greed scenario, it’s already too late

    1. Artists, musicians, beautiful women. What does the cream of the crop, in those categories equal? It equals money. Now it’s just a sampling but you will get the gist shortly.

    While all the artists, geeks, and driven people were pursuing their natural passions, you have an element whose passion, is to pimp all the talent, resources, and EVERYTHING for profit. Their talent, is greed.

    That’s why the bank owns everything, and we, the talented, in varying degrees, have been prostituted by them. We were too busy loving what we do, to love money like they do, and we did not see what they were and are up to: MONEY WORSHIP.

    In this form of (inter)national worship EVERYTHING is sacrificed to this “god”. Morals, constitutions, ethics, their own daughters to the porn machine, you, me, our houses, our freedom, our future wealth, all of our money, soldiers, peoples, the weak, the poor, the strong, dogs, cats, mice, EVERYTHING.

    By the time it comes to reap on your, IRA for example, the bank greed machine will have squandered that already. And by the time every one of us fools put’s it together, we will have seen, it was gone 5 years ago, and I mean GONE (overseas, and adios! LOL). And then they come to pillage more, and more, more, more, more. Why?

    They will not stop, until the global desperation this eventually leads to, leaves us a glowing nuclear cinder…LOL (e.g. They are lawyer built, protected and justified, money loving fools; Plain, simple, and we trusted these profiteers.)

    But in the meantime. Do you know anyone you can give 100K dollars to< amongst your friends, and come back to 110K, in 10 years? Even the 100K? Those friends are very very hard to come by. Is the bank that friend? In the end, and now, is the bank going to be our friend?

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