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The Nation's Pulse
Insolvency, U.S.A.
There are fiscal cliffs at every level of government, and it doesn’t help that states and many municipalities cannot legally go bankrupt.
Last week marked this season’s first pow-wow between Illinois’ union and legislative leaders regarding what has become known as a pension “funding crisis.” It surprised nobody (least of all Illinois’ Democratic House Speaker, who failed to attend) that this summit produced nothing new. Meanwhile, the pension driven deficit “widens by $17 million a day,” according to Bloomberg. The situation has become so dire, that the state has postponed a $500 million bond offer in hopes that some kind of solution will ameliorate the consequences of the latest S&P downgrade to A-.
Head southwest, and last week also marked the deadline for the latest hearing in the San Bernardino bankruptcy proceedings. Bankruptcy rules have so far protected the city from its obligations to the California Public Employees’ Retirement System (CalPers) until it has come up with a sustainable plan to pay off all its debts.
Finally, last week marked the final satisfaction to the fiscal meltdown in Central Falls, Rhode Island. The town filed for municipal bankruptcy in August 2011 and emerged 15 months thereafter. In the meantime, former mayor Charles Mureau pled guilty to federal corruption charges. He has now been sentenced to two years in prison for accepting gifts and directing city contracts to a political ally.
Though lately the federal “fiscal cliff” and its consequences have garnered national attention, Americans have paid comparatively little notice to the fiscal cliffs in their own backyards. Estimates of unfunded liabilities for state and local pensions vary, depending on who’s tabulating, but numbers like $1.4 trillion or $4.4 trillion are in the realm of possibility.
The fact that states have complete discretion over legislating how municipal debts are handled has further obscured their severity by complicating the way municipal bankruptcy is perceived.
A Hidden Problem
The Constitution
gives Congress the responsibility to “establish…uniform laws for
bankruptcies throughout the United States.” This it has done, more
or less ably, in the Title 11
Bankruptcy Code.
Bankruptcy is important to commerce for reasons that are quickly obvious: It protects debtors from any kind of debtor’s prison and helps to ensure that creditors get as much of their investment back as possible. The process works smoothly in cases concerning private individuals (Chapter 7) and corporate enterprises (Chapter 11).
Chapter 9, which deals with municipalities, is trickier. And states simply cannot file for bankruptcy at all. The reason is simple: Much of the usual work of settling debts takes place in federal bankruptcy court. But due to the Constitution’s 10th Amendment, a federal bankruptcy court has no real power to enforce fiscal “solutions” on debt-laden municipalities. States have capitalized on these restrictions by putting up statutory barriers that prevent cities from filing a Chapter 9. Reasons for this are obvious enough—protecting a state or region’s credit rating and reputation as a good place to move to and start a business, as well as keeping control of finances in state. As a result, only 12 States provide blanket authorization to file Chapter 9, and a full 22 States prevent access altogether. The remaining 16 have restrictions and processes that vary from strict to lenient. In Illinois, a Governor-appointed commission has to decide filing is necessary, after first trying everything else to save the situation. In Idaho, on the other hand, the municipality simply has to adopt a resolution to authorize the filing.
These differences in state policy render any figures on Chapter 9 filings obsolete, and make it difficult to conduct any nationwide analysis of municipal financial health. It should not be surprising that the states with the least restrictions on filing come up as the states with the highest number of filings. Of all states, Nebraska tops the list, followed by California, Texas, and Alabama. These statistics do not conform to other measures of fiscal health: Texas, which continues to grow rapidly, would not be so high on the list in that case. Even California, lambasted these days as the most fiscally irresponsible state, may not be worthy of such a reputation. Despite such high profile Chapter 9 filings as Stockton (the largest city to ever file), Mammoth Lakes, Vallejo, and most recently San Bernardino, its pension funding problems are marked by some rating agencies as less serious than the ones in Illinois. And how many Chapter 9 filings are recorded from Illinois since 2010? Zero.
Since Chapter 9 filings are no comprehensive indicator of a city or region’s financial health, citizens and investors are forced to rely on other instruments—such as bond ratings agencies like Standard and Poor’s. But these are likewise flawed. The rating agency Fitch, for instance, ignores distinctions in state laws.
“Bond ratings tell you virtually nothing about whether or not a city is on the verge of service-level insolvency,” writes Mark Funkhouser, director of the Governing Institute. “A government’s bond rating is a lagging indicator of its financial condition. Waiting for a downgrade to adopt more prudent financial practices is like waiting until your car slams into a tree before you hit the brakes.”
Is Bankruptcy So Bad?
Municipal bankruptcy, though, might be the bitter medicine
necessary to get a community back on track. This is especially true
when compared to some kind of bailout or loan package that states
use to put the problem off. At the very least, bankruptcy keeps the
issue localized—so that fiscally insolvent cities and interest
groups aren’t being permanently propped up by other regions within
a state.
Mark Funkhouser, in his article “The Subtle Slide into Municipal Bankruptcy,” writes:
Filing for bankruptcy is a legal event, with a public declaration occurring on a precise date. Insolvency, however, is a financial condition that creeps in unannounced. Cities like Stockton and Central Falls were insolvent long before they declared bankruptcy….Once a city is in deep trouble, the only way citizens are going to be protected long-term is through bankruptcy. When a city declares bankruptcy, citizens can begin to get their services back. In bankruptcy, the city can determine the “net present value” of a reasonable stream of taxes and fees and then spread the pain among bondholders, employees and citizens to bring expenditures in line with that value.
It is easy to see at which stage of development Illinois and San Bernardino currently stand in relation to their fiscal woes: Central Falls—a closely supervised road to recovery, with the satisfaction of justice served to their former embezzling mayor; San Bernardino—in the unenvied position of fiscal protection while they sort out how to pay their debts; Illinois—a state of rapidly dwindling denial, in which solutions are quickly becoming beside the point.
About the Author
Jackson Adams is an editorial intern at The American Spectator, a former teacher, ski instructor, and political campaigner, and a graduate of Theology from the University of Oxford.
Letter to the Editor View all comments (21) | Leave a comment
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Robbins Mitchell| 2.21.13 @ 6:19AM
Well,these blue state public employee unions who have always voted straight Yellow Dog are being done in by their own greed and corruption....cry me a river
Von Mises Jr| 2.21.13 @ 8:52AM
The problem seems to be even much graver. Allegedly, in New Jersey, Public Employee Pension Plans for State workers that include the teachers and cops that retire on the State Pension Plan have protection even superior to Bond Holders. So when the State hits the wall, even though massive jobs will be lost and services discontinued, it appears the retired public employees still get their $50K+ pension annuities while even Bond Holders may face the same fate as Chrysler with perhaps thirty cents on the dollar.
Christie has helped the situation but only delayed the inevitable. When he took Office, the Pension Plan had some $47B in Contributions that should have had $107B or $0.44 on the dollar. The $65B in Cadillac Health Plans had zero invested, so the net obligation was funded at about $0.27 on the dollar.
To his credit, Christie raised the cost of health care on public sector unions from 3% to 30%, or from about $60 per month to $600, but this only delays the unavoidable. And when retired teachers and cops are driving BMW's and eating steak while others out of work and broke, it does not bode well.
Maxwell| 2.21.13 @ 9:45AM
Von, as long as we are on the subject of Chris Christie I (as always) have a few questions. First is, I still don't know why Christie did not say to the state workers & their union, you want to belong to the union, it is up to you. I (the state) will no longer collect dues. The average state worker would probably see an extra 35 to 60 a pay increase.
Second, I would have loved Christie to have raised the gas tax and fully fund the Transportation Trust Fund. No games to be played with the trust fund, I know that would be a challenge. I think that would have showed real fiscal management. Speaking of the Transportation Trust Fund, there was just ONE Dept. of Transportation Commissioner in the past 30 years who knew what he was doing, Jack Lettiere. He got tossed out because he was NOT political.
Von Mises Jr| 2.21.13 @ 11:15AM
To Christie's credit, he did raise another $500+ per month from public employees to help fund the Cadillac Health Plans. He also raised the Pension contribution, I believe. So he dealt with a time bomb by keeping it from going off within about 5 years to something longer.
But New Jersey is a socialist cesspool and the people of New Jersey need him to stand strong on other issues. The two-thirds majority in the Senate and Assembly keep sending him a Foreclosure Bill that would be New Jersey's Sub-prime on steroids and so far he has vetoed it. He did veto the ObamaCare Exchanges for now. He had an Agenda21 Executive Order that waned after Sandy. Perhaps there was at least one good thing that happened during the disaster. But the DOT, HUD and other bureaucratic entities seem more interested in implementing Agenda21 as the central planning fix for everything.
So New Jersey may be too convoluted and too far down the road to save. The accumulation of corruption and greed over many decades has this State with insufferably high taxes, over-priced housing and constant infringements on liberty and property.
Now the Assembly (today I believe) wills surly pass gun control. It then goes to a Senate that is 5-3 Democrat and most likely will move to his desk. I suspect that if Christie signs gun control into law, his only chance at re-election is as a Democrat. And that is not very likely with so many hardcore socialist in the State.
Maxwell| 2.21.13 @ 11:21AM
Von, your last paragraph was of the most interest. If there is more gun control signed into law by Christie (like there already is not enough) then I think Christie will cook his own goose as far as his national ambition goes. We will see.
Von Mises Jr| 2.21.13 @ 1:11PM
He will not even be re-elected in Jersey if he signs gun restrictions, Maxwell. About 500 people showed up about a week ago to protest the Assembly passing some 24 gun Bills. The other day, a MoveOn protest was outnumbered by about 3-1 by our new 2nd Amendment group and others. There are dozens of TEA party groups I am familiar with in Jersey and the numbers I have heard in terms of groups and email lists is surprisingly high for the Northeast.
Our State has some very rural areas and we are close to PA and Upstate NY where many sportsmen hunt and fish. Christie is not as popular with the people in the State as he is with the nation since we have two-thirds liberals that tend not to support him and we have some pissed off conservatives over this gun control Legislation.
Maxwell| 2.21.13 @ 1:20PM
You referring to nj2am, i think that is the group that I have to join this week. The protest was all all over AR15.com, hometown section. As I say, don't blame me, I voted for Lonegan.
Von Mises Jr| 2.21.13 @ 2:36PM
Here is the email to get on the list for NJ Second Amendment Group: admin@nj2as.com
Maxwell| 2.21.13 @ 2:48PM
Thanks!
Jacob McCandles| 2.21.13 @ 9:56AM
Yesterday the Fed minutes basically said: "Well, there's a chance that we won't be printing money like this forever...."
and the stock market falls, gold plunges. Is this the most absurd situation ever?!
Jacob McCandles| 2.21.13 @ 9:57AM
Anyone who has any common sense knows where this is headed, correct?
Kwan| 2.21.13 @ 10:38AM
I suspect it'll be a modern day version of the Weimar Republic. Which means investing in companies that manufacture wheelbarrows could be profitable.
Jacob McCandles| 2.21.13 @ 11:00AM
Good suggestion Kwan. Peter Schiff is one of few economists who seem to get this. All this capital created out of thin air....
TLP| 2.21.13 @ 11:51AM
Absolutely.
I think the Author might wanna check I with the Chysler Bondholders about the Bankruptcy Laws. And, find out how the Halfrican's Pal's got paid, before the creditors, in the Solyndra Mafia Front Company deal.
We can't right the ship. The Democrats are determined to Lay Her Low with a Death by a Thousand Holes. Drilling another Hole in the Floor, every Minute of every Day. Every Day of every Week, Every Week of every Month. Every Month of every Year.
President God is not gonna take one step backwards. Not one. He will Print, Borrow, Steal, and Spend, until somebody stops him.
As Sean Connorey says to Kevin Costner, in the Movie: The Untouchables - "What are you prepared to do?"
Republicans have to answer one simple question: Is this Country more important than your Cushy Job?
Think about it: If you go to Washington to Do the Right Thing? Then, why do you NEED a Political Consultant? Why do you CARE what the other side is calling you? Why do you WORRY what the Liberal Media might say about you?
I've written this a Thousand times: "What does it profit a man, to Gain the whole world, and Lose his Immortal Soul?"
I don't Lie. I don't Cheat. I don't Steal. And, I've Never Cared what others thought about me. Which might explain my working for Other People only 3 Years, my entire life.
It's the easiest thing I've ever done, and something that is all but Impossible to find in the Sodom and Gomorrah on the Potomac.
We're Flucked.
Get used to it.
markenoff| 2.21.13 @ 1:22PM
You wanna know how to get Obama? They pull a knife, you pull a gun. He sends one of yours to the hospital, you send one of his to the morgue. *That's* the *Chicago* way! And that's how you get Obama. Now do you want to do that? Are you ready to do that? I'm offering you a deal. Do you want this deal?
markenoff| 2.21.13 @ 1:25PM
Welcome to Chicago.This town stinks like a whorehouse at low tide.
TLP| 2.21.13 @ 2:55PM
And, don't go lookin for that Whore, with a heart a gold, either.
Cat Shot| 2.21.13 @ 12:54PM
I used to think nothing of lying, cheating and stealing. Until the Good Lord beat the living hell out of me. He's coming, and He's pissed off.
TLP| 2.21.13 @ 2:56PM
You n me, both.
cicero| 2.21.13 @ 2:56PM
Municipal bankruptcy works only if the restructuring solves the problem. Stocton, Ca., emerged from its Chapter 9 with police and fire salaries and pensions just as idiotic as they went into it with. When the "public servants" are earning twice as much as those whom they profess to serve, and can retire with pensions in half the time as those they profess to serve, you have the tail wagging the dog.
The citizens of this country have sold themselves into bondage. They traded the promise of "safety" for freedom, and now they shall have neither.
homme nike air max BW | 2.22.13 @ 2:41AM
The situation has become so dire, that the state has postponed a $500 million bond offer in hopes that some kind of solution will ameliorate the consequences of the latest S&P downgrade to