States Busy Strapping on Bankruptcy Kneepads

January 2011
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States Busy Strapping on Bankruptcy Kneepads

22 January 2011

George Rebane

Regular RR readers are not a bit surprised by the big news heading into this weekend – the states are getting ready to march to Washington, on their knees, and beg for new legislation allowing them to renege on their debts, especially on the $2.5 trillion (unfunded liabilities) they owe to their own employee pension funds. This involves Congress passing laws that will allow states to declare the equivalent of Chapter 9 bankruptcy and restructure/abrogate contracts with public service unions, pension funds, current employees, retireds, current vendors of goods and services, you name it (more here, here, and here).

It wasn’t too long ago since the sheltered left, on this and other blogs, took us to task for pointing out the inevitability of the coming bankruptcies. We were blasted as know-nothing fear mongers by progressives who saw no end to tax and spend. My own involvement started with co-authoring with Mike McDaniel the 28dec07 SESF report ‘Unfunded Liabilities – Our Community’s Fiscal Timebombs’. Since then, in addition to numerous RR posts on the topic, I have railed on this topic in my Union columns and KVMR commentaries.

During these past years I have also had numerous conversations with employees at various levels of government that included teachers. My question was always ‘why are you not concerned about your government pension going into default?’. The answers ranged from having no clue about the health of the government fisc, to not wanting to “talk politics”. Politics??!! The common response was to keep voting for the same scumbags who got them into this mess.

In the meanwhile we continue busily destroying the states’ economies with various leftwing mandates ranging from funny looking lightbulbs, uneconomical electric cars that have larger carbon footprints than regular cars, green and ‘cleantech’ jobs, nationalized healthcare, and more regulations stifling innovation and energy production than we can imagine. CARB’s headlong implementation of AB32 in California has yet to draw its second wind. And people still continue speaking of trying to find a “middle ground” with the socialists. Talk about rearranging deck chairs.

(And here is the same message within the larger international scope, but delivered in a more entertaining manner. H/T to a RR reader.)

Exit question: What are you doing with your munis?

Posted in California, Current Affairs, Our Country

30 responses to “States Busy Strapping on Bankruptcy Kneepads”

Russ Steele

22 January 2011

Tom Sullivan on KNCO yesterday discussed this issue at length in a segmentc called CA EMERGENCY!
Congress is reportedly working on a way for states to wiggle out of their financial obligations and avoid bankruptcy. But some say allowing troubled states to file for bankruptcy could prevent local governments. Tom says either way, unions will somehow end up on top! Plus, California declares a financial state of emergency. And, mayors from across the country ask Washington for a bailout!
A Podcast of the program can be found here. Tom points out that when GM was bailed out The Union’s Took over management of the company. Could a bailout of the States put the Public Service Union in charge of our future? It happened at GM, why not in California? In Tom’s view “munis” owner will be the big losers.

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Mikey McD

22 January 2011

SNL clip summed up the past 2 years very well.

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Steve Frisch

22 January 2011

If muni owners are the big losers in California, which is very likely since the current financial situation is going to require that everyone take a haircut (and I mean everyone from homeowners, to businesses, to taxpayers, to state programs, to local government, to unions, to investors in muni’s) then it will be because they invested their private money and took a risk to get a particular ROI without sufficient tax revenue or level of service to pay back the loans. That is the marketplace at work. Private investors, private risk, private gain, private loss.
By the way, there will be no state bankruptcy filings, but the will likely be federal guarantees on state and possibly some local bonded indebtedness. Will your private investors then hew to your libertarian principles? Or will they accept federal guarantees? I think a true conservative would be calling on them to ‘man up’ and take their loss.

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Todd Juvinall

22 January 2011

If the muni’s are no longer any good it would be one more huge dagger in the eye of the left and their policies which have wrecked our country and its financial responsibilities. There is risk in any investment but a muni has been the least risky besides a treasury for investors. If the government renigs on them, just like Obama did with GM and Chrysler, the whole underpinning of our country’s infrastructure financing goes down the tubes. So not only will he individual investors be cheated, the future generations will be as well because the roads, sewers and water lines will not be built. Yeah, those investors just have to take it eh Steve? I bet you won’t be so smug when they pull grants and tax dodges for certain non profits.

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George Rebane

22 January 2011

Moralizing about the behavior of capitalists is about as fruitful as moralizing about the behavior of socialists. Some time ago in these pages I humbly offered the Rebane Rule of Capitalism – ‘The good part of capitalism is that it will game the system; the bad part of capitalism is that it will game the system.’ You can bet the farm on it.
That suggests that the proper role of government is to fashion the system in such a way as to ensure that the gamers contribute to the overall quality of life in a sustainable manner that does not kill off its enabling wealth generation.
(The astute reader will note that the Rebane Rule applies equally to socialists and other types of humans. Cass Sunstein call your office.)

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Scott Obermuller

22 January 2011

Steve – the dirty business in this mess will be the same as the GM union bailout. Yes, there is risk and some will lose out. But as in the GM debacle, the govt. will step in and change the rules after the fact and allot the winners and losers on a strictly political basis. Investors have a right to the game being played out fair and square. The states and municipalities got low rates from investors based on a set of rules that will be thrown aside when it becomes inconvenient for the govt. to pay up. Once this becomes clear, who will invest and at what rates? We were a nation of laws and not a banana republic, but we are sinking to nearly that level. Yes, there were always crooked folks at various levels trying to game the system, but they hid their schemes for fear of being unmasked and sent to prison. Now it’s being done openly at the highest level and more is promised. Crony capitalism will lead to rampant distrust and a breakdown of financial order. Capital will flee the country for a more stable and orderly system overseas. To try and to stop it, more draconian measures will come into being and the vicious cycle will continue downward. It’s happened elsewhere and it will happen here if we are not careful. The profligate states must not be bailed out. If they are, they will see no negative consequences of their actions, and will continue to outspend their income.

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Steven Frisch

22 January 2011

So Todd, what would you do to stabilize municipal bond markets? There are only three solutions, cut expenses (services), raise revenue (or some combination of the two) or stretch and guarantee payments.
So my question to you Todd, is will you, and other highly moral libertarian ‘thought leaders’ reject federal guarantees to stabilize municipal bond markets if it comes to that?
By the way, that same theory could be extended to home mortgage’s couldn’t it? Would you have allowed mortgages, the companies that insure mortgages and banks holding mortgages to fail?
Ironically, I agree with George that one of the proper roles of government is to fashion the system in such a way as to ensure that the gamers contribute to the overall quality of life in a sustainable manner that does not kill off its enabling wealth generation (which is a bit redundant because you cannot be ‘sustainable’ if you do not enable wealth generation).
The rub is the concept of ‘contributing to the overall quality of life in a sustainable manner’. I would argue that the destruction of the American middle class by government policy that indemnifies the top 10% of the population from loss while allowing the bottom 90% to pay the price, and gradually decline from the middle class to the poverty class, is not ‘sustainable’.

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Steven Frisch

22 January 2011

Scott, then I take it you support no stabilization effort for municipal bonds, and let the states and local governments crash in the short term, which means the investors take the hit. If that is what you support, fine, I want to hear people say it.
One thing that is really important in the muni crises will be holding the people who are driving the decisions responsible for their actions.
Investors invested in these bonds knowing the nature of government, knowing that many were spending above their means, and knowing there was risk–so let them fail. Just like when I but a stock.

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Steven Frisch

22 January 2011

By the way the whole kneepads analogy is a little crude don’t you think.

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George Rebane

22 January 2011

Re munis – yes, let the investors take the hit. No bailouts from the frugal and temperate to the profligate and intemperate.
Re the continued effort to appeal to moral behaviors that are the implied subset of legal behaviors – my comments above stand, to which I would only add the teachings of Garrett Hardin (‘The Tragedy of the Commons’).
Re the kneepads analogy – crude, perhaps, but it communicates. You have to remember that I am one generation removed from my Estonian farmer grandparents (both sides), and suffer from a certain cultural viscosity in moving to more refined expressions of strongly held sentiments.

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Steven Frisch

22 January 2011

My German grandmother would have thought for a minute, blushed, then scolded me……

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Todd Juvinall

22 January 2011

A muni bond is tied to a certain project if I am not mistaken. It is different than a stock. The government, those trusted people we elect to oversee our taxes and bonds are the people who make the decisions on the budget. The history of government debt and the repayment of that debt was simple. You pay the debt first then pay everything else. If the government defaults on the debt payments they risk the demise of so many things that I cannot see it happening. The states have no constitutional right to go BK. They can always cut expenses or raise taxes or both. In California’s case, the politicians have been so profligate that the pain will be immense. Then if the people are smart they will do what New Jersey did and elect a Chris Christie governor and throw out the liberal bums in the legislature. One of the major criticisms I have against Arnie was his lack of using the blue pencil. He could have balanced the budget every year but he did not want to take the heat. Well, his legacy sucks and he did it, no one else is to blame. Regarding mortgages, the left under Barney Frank and Chris Dodd empowered Fannie and Freddie to become the holder of all mortgages and the banks just loved that. They could turn over their mortgages and do some more. The banks should be the end holder and the packaging of mortgage securities means no one knows who owns the mortgage until it is paid off or foreclosed on.

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Steve Enos

22 January 2011

The headline above includes… ” Strapping on Bankruptcy Kneepads” and then is followed by a number of posts.
My following post and the issues I raise regarding fiscial responsibility and the application of standards to these issues are on topic. My post also responds directly to the comments posted under this story.
George raised some very important and solid issues that must be addressed, they must be faced. We got into this mess for a number of reasons. The blame and solutions should require a level field for all, that standards be applied to all, not just “some”.
Those that offer opinions on how we got here and try to apply the blame to some and not others offer hypocrisy vs. solutions. The follow exposes the hypocrisy I speak of. The question is, will anyone else here stand up and apply the same standards to all or are there two sets of standrads to be applied?
So I find it amazing that Todd posts about others and government. Todd just posted about:
“If the muni’s are no longer any good it would be one more huge dagger in the eye of the left and their policies which have wrecked our country and its financial responsibilities”
“If the government renigs on them, just like Obama did with GM and Chrysler, the whole underpinning of our country’s infrastructure financing goes down the tubes”
“investors be cheated… Yeah, those investors just have to take it Steve? I bet you won’t be so smug when they pull grants and tax dodges for certain non profits”
Todd’s post about others is the highest form of hypocrisy.
So what about real estate developers that borrow money from banks to buy land and build spec houses and ask for and get real estate development loans backed by taxpayer money like FHA/VA and then the default on the loans?
Who bails out the banks? Who eats the losses because the develper walked away for his loans and left others to pick up the tab?
Are there two standards? Do the standards posted here time and time again by Todd and others also apply to real estate developers that borrowed money to buy land and build spec houses and then defaulted on the loans and left taxpayers and investors holding the loss?
Do the readers and posters here have two sets of standards or one set of standards?
It’s hypocrisy not to apply the standards to all.
The following link goes to a story that provides the facts that support my post. Read the story, read the comments posted under this story and see that a local real estate developer borrowed money from banks, backed by bank stockholders and taxpayers money to buy land and build a number of spec homes and then the defaults on the loans were filed by the lenders for failure to pay.
And how do folks feel if a spec house was built, rented out while on the market and the money not paid to the lender? Does this result in “investors be cheated” as Todd posts above?
It’s pure hypocrisy, here’s the link that provides the facts:
http://jeffpelline.wordpress.com/2011/01/14/how-foreclosures-touch-all-of-us/

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Steven Frisch

22 January 2011

Todd, I think we agree, states will not declare BK, thus we will cut expenses and increase taxes, so lets go, get behind Jerry Brown plan to do just that, and eliminate our state deficit and much of our debt in 5 years.

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Todd Juvinall

22 January 2011

I cannot support tax increases. The reason we have a deficit is not because we don’t pay enough taxes but because the government spends too much. I would first like to cut spending to balance with income to the treasury. Then pare back the regulations and rules which cause the deficit by forcing jobs to other nations and states. Jerry Brown started all this under his first terms and now he has to finally get realistic about what he and the liberal legislature have done.

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Steven Frisch

22 January 2011

Just as I thought–no balance between the two approaches–just your way. This is why we are stalemated, no ability to give up anything to reach a solution.

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D. King

22 January 2011

“Todd, I think we agree, states will not declare BK, thus we will cut expenses and increase taxes, so lets go, get behind Jerry Brown plan to do just that, and eliminate our state deficit and much of our debt in 5 years.”
Ah yes, The Five Year Plan.
http://www.cusd.chico.k12.ca.us/~bsilva/projects/russia/stalin/5yearplan.htm
“Instead of finding a better solution to expediting the industrialization of the Soviet Union, Stalin implemented more five year plans, the plans continued until the fall of the Soviet Union. “
Let’s do that!
“Just as I thought–no balance between the two approaches–just your way. This is why we are stalemated, no ability to give up anything to reach a solution.”
Jerry Brown plan?
Maybe Todd saw this Steve.
http://www.youtube.com/watch?v=AIlzYD4tk78
After all, with age comes wisdom…right?

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Steven Frisch

22 January 2011

I guess we can never use the words ‘plan’ and ‘5’ in the same sentence again because of Uncle Joe.

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Todd Juvinall

22 January 2011

The left has been passing the laws and spending the money for almost fifty years here in California. The R’s have bee (Assembly only)in the majority one year in the mid nineties. If you look at the per capita spending you will see a huge increase in dollars and percentages with little or no support from the R’s The R’s try every year to bring sanity to the state budget. The dems say go to hell, we will pick off one or two RINO’s and we will do what we want. They have. The state is massively in debt and it is spending. It is not the tax level. The left has been successful in the laying on of guilt that little old ladies and the children will be terribly affected. Yes, and where has that got us with the huge spending by the left? Debt and insolvency. Yes I refuse to compromise because the left never ever cuts, they always find more taxes or fees to steal from us. When the left cuts and for more than one year in a row, I may trust them.

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Greg Goodknight

22 January 2011

Pelline has an interesting perspective on foreclosures hurting everyone. He apparently paid top dollar for his place in 2005, maybe $150K over the local market (though a bargain compared to his old haunts in ‘frisco), and it’s quite possibly now worth half of what he paid.
Funny how he didn’t talk about his own losses in that piece.

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Todd Juvinall

22 January 2011

He is a trust baby probably so it may not matter.

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Mikey McD

22 January 2011

D. King great clip! http://www.youtube.com/watch?v=AIlzYD4tk78
Step 1. Privatize education via tax breaks for parents and grandparents whom sent their kiddos to private school (50% of budget is education).
Step 2. Replace public employee pension plans with 401k’s for public employees for ALL NEW HIRES.
Budget SOLVED with no broken promises, same services provided and no increase in taxes. DAMN THAT WAS EASY.

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Scott Obermuller

22 January 2011

There is a lot of different stuff flying around here. I was talking about the state govts. and how they will be bailed out. The bond holders as I understand it, will be, as they should have been in the case of GM first in line. Obama stepped in and cheated them out of what was established practice. The munis have different rules depending on what was used to secure the credit for the bonds. Some are based on revenue from the project, some have other rules. I’m not real up on munis. Most state bonds in California are highly secure in that the bond holders come first. That is how they are able to sell so many bonds at such low rates. California can not declare bankruptcy. That is why there is so much fiddling behind the curtain right now. The taxpayers are on the hook to pay the bond holders first. This of course will be played as “rich” pigs making poor people suffer and so we need to once again change the rules after the fact. BO and company have to bail out California and other states in such a way as to maximise a power shift to the feds and not completely incense the other states that don’t need to have a bailout. As far as “getting behind Jerry” – you have to be kidding. California just passed the biggest tax increase in memory and we fell even further into debt. Now we need “balance”. Right – let’s balance the poison with the food. There is a known way to grow our economy out of this mess and we refuse to take it. It’s going to be interesting.

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D. King

22 January 2011

“Privatize education”, I don’t know Mikey, they’re doing such a good job educating the kids now.
Listen to this Progressive idiot lady talk about science. ha ha ha….
http://www.youtube.com/watch?v=la-UEdoWVwI
“School board member Bruce Barlow said AIDS Services overstepped its bounds by offering flavored lubricant and candy in the kits, when the school administration believed only condoms were being handed out.”
“…offering flavored lubricant and candy…”?
I never got any of that stuff when I went to school. 😦
I wonder if they got a ride in a cool panel van too.
That school board should be living under an overpass in Florida.
401k’s for public employees is a good idea too!

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George Rebane

24 January 2011

While confirming the thrust of my post, E.J. McMahon of the Manhattan Institute argues that ‘State Bankruptcy is a Bad Idea’ here
http://online.wsj.com/article/SB10001424052748704881304576094091992370356.html?mod=WSJ_Opinion_LEADTop

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Dixon Cruickshank

24 January 2011

Muni bonds are usually tied to a project with revenue of some sort, that is then used to service the debt, any leftovers I guess could be used in the general fund. Although CA may have also issued unsecured bonds at some point, I have no idea but each project is evaluated based on its revenue stream generally.

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NC_Guy

24 January 2011

Lockyer, along with officials from the liberal-leaning Economic Policy Institute, told reporters this morning that California and other states don’t have a debt problem, they have budget problems. They said that the bankruptcy proposal is aimed at attacking public workers and is based on false premises that states are being bankrupted by public employee pay and pensions.
Read more: http://www.sfgate.com/cgi-bin/blogs/nov05election/detail?entry_id=81602#ixzz1Bzsuttv3
Makes you wonder if The Ginchster has some buddies shorting the market…

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NC_Guy

24 January 2011

Again Todd’s statements have little reflection in reality.
“If the government renigs on them, just like Obama did with GM and Chrysler, the whole underpinning of our country’s infrastructure financing goes down the tubes.”
But even before the acute crisis that drove GM and Chrysler into bankruptcy court, there were signs that the UAW, like the automakers, was beginning to come to terms with reality. A landmark set of labor contracts signed in 2007 allowed the automakers to get billions of dollars in liabilities off of their balance sheets and brought their running costs into rough parity with the Asian automakers’ U.S. operations.
Without the rescue from the Bush and Obama administrations starting in December 2008, GM, Chrysler and GMAC would have faced the financial abyss, the report said. Their failure would have been crushing blow on the economy
Ford Motor and General Motors have unveiled plans to invest in their North American manufacturing plants, offering more evidence that the days of conserving cash to survive the recession are ending.
Read more: http://reviews.cnet.com/8301-13746_7-20029334-48.html#ixzz1BzyGz4Xx
So the current press reports of GM out selling in China and the CEO being appointed to help turn the country around seems to refute your thinking.

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Todd Juvinall

24 January 2011

NC_GUY, You have misread the terms of the labor contracts and perhaps you should read them again. The UAW pulled off the biggest scam of history by having the taxpayer bail them out. They even get ownership positions. No, the whole deal is anti=capitalism and the reason they were bailed out was to preserve the labor contracts. There is no parity in their part of making a car with the Asians. The healthcare costs alone per car are more than the steel in it. I would say your analysis is lacking in many ways.

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George Rebane

24 January 2011

The UAW scam has yet to kick into high gear. They are now looking for a mandated open door to go after the foreign car makers who manufacture in the US. The regulations for organizing those factories are highly stacked against the manufacturer and its current cohort of very satisfied workers.
Looking at the success of the public service employee unions, the private sector unions will demand their pound of flesh for delivering the next vote.to the Democrats.
Ultimately the country and the workers will suffer as another segment of our dwindling manufacturing industry become uncompetitive. Socialism is a virulent cancer.

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