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Tags: State Bankruptcy Weighed by House Republicans Blocking Aid

Strapped States May Get Option: Bankruptcy

Friday, 21 January 2011 02:45 PM EST

U.S. House Republicans, emboldened by the majority they won in November elections, want to send a message to U.S. states grappling with soaring pension liabilities: Don’t come to us for a handout.

A broader option, being pressed by former House Speaker Newt Gingrich, a potential presidential candidate in 2012, would be to change U.S. law to allow states to file for bankruptcy, giving them more leverage to renegotiate labor contracts.

Closing the door to U.S. aid may further stress states facing more than $140 billion in budget deficits next fiscal year, according to the Center on Budget and Policy Priorities, a Washington research group. Fewer than half of state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled by Bloomberg. They now face the end to federal stimulus payments granted two years ago to help them cope with the deepest recession in 80 years.

“We are not interested in a bailout,” Representative Paul Ryan, a Wisconsin Republican and chairman of the House Budget Committee, said at a Jan. 6 forum in Washington.

“Should taxpayers in Indiana, who have paid their bills on time, who have done their job fiscally, be bailing out Californians, who haven’t,” he said. “No, that’s a moral hazard we are not interested in creating.”

Representative Devin Nunes of California introduced the Public Employee Pension Transparency Act last month, co-sponsored by Ryan and Darrell Issa of California, that requires more reporting details from state and local pensions and prohibits federal bailouts of states.

Congressional Shift

It’s a shift from the previous Congress, where a Democratic majority in both houses passed the $814 billion American Recovery and Reinvestment Act in 2009 to aid states as the recession choked their tax collections.

“We’re going to look at state and municipal budget issues, their unfunded and underfunded pension liabilities as well as the impact defaults and bankruptcies of municipalities would have on the bond market,” Representative Patrick McHenry, 35, a North Carolina Republican and chairman of the newly formed TARP, Financial Services and Bailouts of Public and Private Programs subcommittee, said in a Jan. 12 telephone interview.

Utah Representative Jason Chaffetz said Republicans have contacted bankruptcy attorneys to discuss ways to change the law to allow states to restructure financial obligations such as debts to retirees. He said it hasn’t been decided whether that would mean allowing states to file for bankruptcy.

Chaffetz said he proposed legislation to oppose federal bailouts of pensions.

Warning Shot

“My bill really sends a warning shot across the bows of the states to get their fiscal houses in order,” he said. “It’s intended to wake up the states, wake up the public, to let them know they can’t just run to the federal government to bail them out.”

Gingrich said in a November speech in Dallas that he’s urging House Republicans to introduce a bankruptcy bill “so that states like California and New York and Illinois that think they’re going to come to Washington for money can be told, ‘You know, you need to sit down with all your government employee unions and look at their health plans and their pension plans.’”

“Frankly, if they don’t want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it,” he said.

States were left out of a Depression-era law that lets municipalities reorganize their finances under Chapter 9 of the bankruptcy code. No legislation has yet been introduced to allow states to seek court protection from creditors.

Doubtful Path

It’s doubtful any state would pursue such a path, given their ability to raise taxes and the adverse effect that would have on their credit standing, said James Spiotto, head of the bankruptcy practice at Chapman & Cutler, a Chicago law firm.

“There are many other alternatives,” he said. “Elected officials would be pursuing those long before pursuing bankruptcy.”

Talk of allowing states to declare bankruptcy may affect investors’ faith in the general-obligation debt they issue, said Gary Pollack, head of bond trading at Deutsche Bank AG’s private wealth management unit in New York.

“One of the reasons we point to them and say that they’re great is that they can’t declare bankruptcy,” Pollack said of general-obligation debt, which is backed by the taxing power of states. “It’s just another piece of negative news that muni market doesn’t need right now.”

Potential for Damage

The suggestion that federal legislation should permit states to declare bankruptcy — potentially allowing them to default on their bonds or reimburse vendors less than they’re due — “could do considerable damage, and the necessity for it has not been proven,” the Center on Budget and Policy Priorities said in a Jan. 20 report. The nonprofit group seeks in part to ensure policymakers consider the needs of low-income families and individuals, its website says.

Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008, stirred concerns in the $2.8 trillion municipal-debt market last month by predicting as many as 100 “significant” municipal defaults reaching “hundreds of billions” of dollars this year.

Investors withdrew $4 billion from municipal-bond mutual funds in the week ended Jan. 19, the most since Lipper FMI began measurements in 1992. It was the 10 straight week of outflows, totaling $20.6 billion since the week ended Nov. 17, according to Lipper, a Denver-based research company.

Republican calls in November for less federal spending resonated with voters angry over the billions of taxpayer dollars spent on financial institutions blamed for causing the financial crisis. Republicans will apply the same argument as they move to prevent states from leaning on the federal government.

Senate Consideration

Senator John Cornyn, a Texas Republican, is considering ways to address state financial woes, “including amendments to the bankruptcy laws,” his spokesman, Charles Chamberlayne, said in an e-mail.

“A federal bailout of state governments is not an option,” Chamberlayne said. “The public sent Congress a clear message that they were against bailouts in November, and Senator Cornyn heard that message.”

Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee on Jan. 7 that the central bank has “very limited authority” to assist states.

“We have no expectation or intention to get involved in state and local finance,” Bernanke said during a question-and- answer session. “To the extent that there’s anyone to look at that, it would have to be Congress.”

Representative Nunes, 37, will reintroduce his December bill this month. It would ban the federal government and the Federal Reserve from offering funds to local governments to reduce or meet shortfalls in their pension obligations.

No Bailout

“The federal government will not provide a bailout,” according to a summary of the bill.

The bill also would require state and local governments to report their pension-plan liabilities to the Treasury Department and to make the data available to the public. Governments that don’t disclose the information would have their federal tax- exempt bonding authority eliminated.

Nunes is a member of the House Budget Committee and the Ways and Means Committee, which deals with taxes, tariffs and other revenue-raising measures.

Republicans hold 242 House seats to 193 for Democrats. Democrats control the 100-member Senate with 53 seats, giving them the ability to block the Nunes or similar proposals, which it would have to approve before it can become law.

© Copyright 2023 Bloomberg News. All rights reserved.

U.S. House Republicans, emboldened by the majority they won in November elections, want to send a message to U.S. states grappling with soaring pension liabilities: Don t come to us for a handout.A broader option, being pressed by former House Speaker Newt Gingrich, a...
State Bankruptcy Weighed by House Republicans Blocking Aid
Friday, 21 January 2011 02:45 PM
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