January 21, 2011

State Bankruptcy Watch

Carroll Andrew Morse

About a month-and-a-half ago, I sent the transition team of (at the time) Governor-Elect Lincoln Chafee a set of potential interview questions, including this one...

There has been speculation in national media that several states facing long-term fiscal problems -- a category that can be fairly said to include Rhode Island -- may ask for a Federal bailout, or that Federal laws will be changed to allow them to declare bankruptcy. Do you believe that either of these options are possibilities for Rhode Island in the near term?
The response from Mike Trainor, then a spokesman for the Governor-elect, now a spokesman for the Governor, was that...
We do not agree with the premise of these questions.
Today, this is the lede of a page A1 story appearing in the 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.

It seems like the premise was sound. The question is now whether we should believe that the Chafee administration is not tracking developments related to state bankruptcy, or just not telling the public that they are.

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Can we just impeach Trainor (aka Mr. $250K) and be done with this?!? This guy is a moron to the utmost degree, yet he's the Governor's right hand man. What's that tell us about Linc?

People often said that Carcieri had the B team working with him. I can't even imagine what can be said about Chafee's.

Posted by: Patrick at January 21, 2011 2:29 PM

I don't think the Governor is worried about the state going bankrupt when he can just tax us more to take care of his friends.

Posted by: John at January 21, 2011 3:52 PM

"It seems like the premise was sound."

It sure was. And is.

Look, it's not pleasant. But RI state and RI municipalities have some fierce fiscal problems - the biggest being a monster of an unfunded pension liability. These are not going to be solved with the solution - "just tax us more" - hypothesized by John.

Posted by: Monique at January 21, 2011 5:28 PM

We're not there yet. While the drain is circling the sink still has quite a bit of water in it.
Fraudulent schemes like borrowing, selling assets,tax anticipation notes,.
reamortization and others will keep the Ritanic afloat for many years yet.
Till 2020?
Maybe...but don't count on it.

Posted by: Tommy Cranston at January 21, 2011 7:13 PM

"We do not agree with the premise of these questions."

Why is it necessary to "agree with the premise" in order to answer a question. It has a nice ring of obfuscation to it.

Although "states rights" are largely ignored these days, they do present a problem in state bankruptcy. Basically, the state would be submitting itself to the authority of a Federal Bankruptcy Judge. Essentially, that judge could impose his will on the state government. This is quite different from. let's say. Civil Rights. In those cases they judge is determining if state actions are constitutional. Remember what happened in Boston when a judge decided to run the school department.

Bankruptcy proceedings are divided between "secured" and "unsecured" creditors. I suppose bond holders for a bridge, or stadium, could acquire the bridge or stadium. I am not sure what the actual collateral is for a bond secured by "the full faith and credit" of a state. Can the creditors seize tax receipts? Certainly the judge could direct application of tax receipts. I assume the debtor state would have to submit a "plan" requiring approval of the judge and creditors. That would be like Alice in Wonderland.

There are a lot of state sovereignty questions there. Such questions might require transfer to a Federal Court with a jury, soley for determination of the constitutionality question. Then return for further bankruptcy questions. Creditors shouldn't hold their breath.

Municipalities already have provisions under Chapter 9, sovereignty questions still permit each state the option to require state approval of a filing. So far as I know, there are no provisions for a state filing.

I am unsure of the criteria, but private sector employees can sue for "unfunded pension liability". I wonder if this applies to govt workers.

Posted by: Warrington Faust at January 21, 2011 9:20 PM

Monique writes:

"These are not going to be solved with the solution - "just tax us more" - hypothesized by John."

There may not be a "solution". But, except for "term limits" imposed at the voting booth, I know of no limit to the power of state governments to tax. Observe that Illinois has just instituted a 67% tax, federal income taxes have gone higher than that.

The governing class will tax and spend for as long as they are permitted. These are the people who refer to "tax cuts" as "costs". That is like Wal Mart referring to sales that failed to occur as "costs".

Posted by: Warrington Faust at January 21, 2011 9:33 PM

"get out from under crushing debts, including the pensions they have promised to retired public workers."

Let's get serious here for a moment. Regardless of the legal issues that might arise, no one is going to strip retirees of their benefits. Some things are foreseeable. Pension increases might be halted, I suppose there is even a very small chance of reduction in amount. I can foresee a reduction in other services, to provide funds for present retirees. It is reasonable to expect a change in the size of future pensions. But, it is not reasonable to expect bands of retirees gathering at Home Depot in the morning looking for work as laborers. Nor will we see them carrying "Will Work for Food" signs. It just don't work that way. Remember, we are asking one government agency (the judiciary) to oversee another unit of government. They are peas in a pod.

Posted by: Warrington Faust at January 21, 2011 9:48 PM

Regardless of the legal issues that might arise, no one is going to strip retirees of their benefits
Posted by Warrington Faust at January 21, 2011 9:48 PM

Don't be so sure. Current retirees (yes current) have already been stripped of their COLA'S. Sleep tight union folks:

COLA reduction laws under fire in 3 states
Efforts to alleviate underfunding face backlash
By Timothy Inklebarger
October 4, 2010, 12:01 AM ET

Lawsuits in Minnesota, Colorado and South Dakota aim to reverse new state laws that reduce cost-of-living adjustments for retired public employees, and the outcome could affect other states' efforts to make similar changes.

Minnesota passed a law in 2009 replacing the annual COLA — which used a formula based on the consumer price index and the state retirement systems' investment returns — with a flat 2.5% annual adjustment until state plans reach a 90% funding level.

Colorado, which had a guaranteed 3.5% annual COLA for public employees and 3.25% for Denver public school employees, froze COLA adjustments in 2010 and replaced the automatic adjustment effective 2011 with a formula capped at 2% until the funded status exceeds 103%.

South Dakota in July replaced its automatic annual COLA of 3.1% with a formula that determines the annual adjustment based on the funded status of the state's pension plans.

Other states are considering making similar changes to the COLAs.

In Ohio, a coalition of unions, retirees, pension plan administrators and others are considering asking the Legislature to reduce the annual COLA to 2% from 3% for existing and future retirees, and New Jersey Gov. Chris Christie said in September that he aims to suspend COLAs for existing retirees....
(This is a very good article on the subject; I'm only pairing down the original comment for fair-use reasons. The entrie article is available at the Pensions and Investments website:

Posted by: Tommy Cranston at January 22, 2011 9:11 AM

"Do you believe that either of these options are possibilities for Rhode Island in the near term?"

That's Andrew's question above.
NY Times below.

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.

There's more from the Times...

"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."

I think I'd rather give the new administration a little time to digest all the information about the State's budget before demanding answers to leading questions. After all what's more important...that the Governor lead the State after a global economic recession or that he answer all the questions put to him by petty ideologues
and cantankerous losers of the last election.

Posted by: Phil at January 22, 2011 9:19 AM


The CBPP's thinking comes straight from the David Cicilline school of fiscal management, where it is believed that money can be made to appear, if you stare at an empty bank account hard enough.

I can't speak to the subject of questions put to the Governor by petty ideologues and cantankerous losers of the last election, but as far as the questions I asked, the public has a legitimate interest in knowing if the Chafee administration is taking the time to understand the more dramatic options being proposed, and how far they might get into a bankruptcy (or bailout) process, before informing the public that it is underway.

Posted by: Andrew at January 22, 2011 12:48 PM


Sorry it took this long to answer. I decided to take action now against a real possibility of having my shellfishing boat frozen in my home port and losing days and possibly weeks of work. This decision was based on the available weather reports and years of experience. (I've been stuck in the winter in my home port twice.) This is the long way of saying that I concede that your question to the then incoming Governor was not without some merit.

Posted by: Phil at January 23, 2011 11:11 AM

Just a clarification, Warrington:

"Observe that Illinois has just instituted a 67% tax"

No, they haven't. They raised their tax to 167% of what it -was-, so the actual income tax rate went from 3% (the lowest non-zero state income tax in the nation)to 5% (not an insane number at all).

Also, the Illinois income tax is constitutionally 'flat' for all brackets. Everyone pays the same rate.

I just did my taxes last night, and I have to say that the actual 'tax' rate I pay isn't so bad. My life (and the economy) wouldn't be very different if the federal and state taxes were -zero-. It's the other stuff that ends up turning a very reasonable ultimate tax rate (2.7% for State, and about 9% for Federal) into a drag on me. It's Social Security (I already put 12% of my income away for retirement, shouldn't I get a break on SS for being responsible?), Medicare (I already have good insurance that my employer pays for), and local property taxes (which seem to climb regardless of the services rendered) that put the overall tax rate up near 25% of my gross earnings, which -does- constitute a real drag on my ability to 'help the economy' by saving or spending.

What really surprised me is the credit for folks who save for their own retirement, it phases-out at far too low an income. If anything, we should be encouraging people of all incomes to save for their own retirement. Combine that with the Mortgage Interest deduction, which encourages folks to perpetually issue mortgages and artificially inflates the price of homes, and it's clear that the federal government -wants- us to live in debt and rely on Social Security.

I say we get rid of the Mortgage Interest deduction (which I benefit immensely from), and replace it with an equal credit given for contributions to retirement plans. One encourages debt and irresponsibility, the other encourages wealth and well-planned lifetime personal fiscal policy.

Posted by: mangeek at January 23, 2011 12:55 PM
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