Tuesday, August 2, 2011

Why Bankruptcy Should Never Become an Option for Illinois



Though the State’s liabilities exceed its assets, and the State has a cash-flow problem, bankruptcy should never become an option. Why? Bankruptcy would destroy the State of Illinois’ credit rating completely and its ability to borrow at affordable interest rates; the State’s budgets would be slashed; bond sales would plunge, and the bond market would destabilize. Most importantly, the U.S. Constitution prohibits any state from declaring bankruptcy or “impairing the obligation of contracts” (Article 1, Section 10).

Since a major source of revenue for Illinois and other states across the country comes from the federal government, congressional legislator Newt Gingrich coincidentally asserted that U.S. law should be changed to allow a state to file bankruptcy, thus, giving it more leverage to renegotiate labor contracts.

In other words, Gingrich and other legislators perhaps believe that state governments could break the unions’ resolve to protect public employee pensions by using bankruptcy as their trump card; moreover, Gingrich wants us to know that the federal government is no longer in the “bailout business.” We may insinuate that the latter is quite ironic, considering the depletion of trillions of dollars from taxpayers to bail out bankers, corporations, and the wealthy that had devastated the U.S. economy and the lives of millions of people.

Illinois Senator, Mark Kirk, agrees with Gingrich and is advocating for a law that would allow a state to declare bankruptcy, even though state bankruptcy would invariably rob public employees of their contractual right to an earned pension.

It is true that if a state declares bankruptcy, all fiscal contractual obligations would be placed under court jurisdiction. State employee contracts would be under court authority and subject to its revisions, resulting in cuts not only to pension funds, but to salaries, benefits, and bondholder obligations. Thus, pension funds could be liquidated entirely, and the State bond market would be rendered ineffectual for earning further capital.

Perhaps what might have prompted discussions regarding a state’s option to declare bankruptcy is a bill introduced a few months ago by U.S. Representatives Paul Ryan and Devin Nunes, entitled the Public Employee Pension Transparency Act (H.R. 567). This bill would require more reporting from state and local pensions and prohibit federal bailouts of states: “…state or local government employee pension benefit plans are becoming a large financial burden on certain state and local governments and have already resulted in tax increases and the reduction of services.

“In fact, a recent study published in the Journal of Economic Perspectives found that the present value of the already-promised pension liabilities of the 50 States amount to $5.17 trillion and that these pension plans are unfunded by $3.23 trillion…

“Some economists and observers have stated that the extents to which state or local government employee pension benefit plans are underfunded is obscured by governmental accounting rules and practices, particularly as they relate to the valuation of plan assets and liabilities. This results in a misstatement of the value of plan assets and an understatement of plan liabilities, a situation that poses a significant threat to the soundness of state and local budgets…

“[Hence,] the United States shall not be liable for any obligation related to any current or future shortfall in any state or local government employee pension plan. Nothing in this Act (or any amendment made by this Act) or any other provision of law shall be construed to provide Federal Government funds to diminish or meet any current or future shortfall in, or obligation of, any state or local government employee pension plan” (H.R. 567).

Two questions now come to mind. Was it alarming to witness the ticking down of the procedural clock and the dangerous “game of chicken” played by some of our reckless, mulish U.S. legislators to make their point? Shall we applaud the histrionic tantrums, political posturing, and financial incompetence of these politicians?

With great concern, we might also assume that given the ineptitude and irresponsibility at the federal level, the bankruptcy option would be the preferred choice for some of our federal and state legislators for solving a state’s fiscal problems, especially in Illinois.

We must also be aware that it’s not only a few members of Congress that have lost common sense. As stated by the Center on Budget and Policy Priorities (January 2011), “various pundits [also suggest] enacting federal legislation that would allow states to declare bankruptcy, potentially enabling them to default on their bonds, pay their vendors less than they owed, and abrogate or modify union contracts. Such a provision could do considerable damage, and the necessity for it has not been proven.”

The Center on Budget and Policy Priorities affirms that “it would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations, [particularly Illinois]... Confusion between short-term cyclical deficits and debt, pensions and retiree insurance – and the overstatement of the magnitude of the latter set of problems – draw attention away from the need to modernize state and local budget and revenue systems and address structural problems that have built up over time in these systems.

“States suffer from ‘structural deficits’ or the failure of revenues to grow as quickly as the cost of services… Structural deficits stem largely from out-of-date tax systems [as in Illinois], coupled with costs that rise faster than the economy in areas such as health care. Fixing these structural problems would help states and localities balance their operating budgets without resorting to [desperate measures]… It is far more constructive to focus on fixing these basics of state and local finance than to proclaim a crisis based on exaggerations of imminent threats.”


For better options, please read “Spread the Burden of Taxes and Address Tax Inequities in Illinois” (July 25), “How about Tax Reform, the Most Important Issue in Illinois?” (June 8), and “The public pensions’ funding gap: three questions/three solutions” (May 14) posted in this blog.

3 comments:

  1. If the State was allowed to file bankruptcy I would think this would make the business community very uneasy. What individual or business would want to have a contract with the State if there is a possibility that that contract could be broken?

    In regards to bailouts, I was wondering about the Federal Reserve
    The Federal Reserve has come to the rescue of the corporate world and so what about the Reserve coming to the rescue of state government It would be great if the State of Illinois could obtain a very low interest rate through the Federal Reserve for its pension debt But , of course the S/P and others would object to this since this would be taking interest money away from them

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  2. As of now, Federal bankruptcy laws do not allow for a state to file bankruptcy. Unfortunately, there are a few current Illinois legislators that would like to see this option, as there were in 2011: "In 2011, Jeb Bush and Newt Gingrich co-wrote an op-ed in the Los Angeles Times supporting the concept. Prominent conservative activist Grover Norquist also publicly backed the idea. Congressional Republicans began to draft a bill to provide for state bankruptcy, but it stalled in early 2011 after failing to draw support from prominent GOP leaders such as then-House Majority Leader Eric Cantor."

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  3. Since when do corrupt lawmakers feel the need to follow the law? Illinois, New Jersey, Florida, etc. are the corruption called government that needs to be fought day-to-day and year-to-year if we wish to survive.
    Yes, if given the opportunity these people would deny us our income.

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