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[EWSoccer64]

Under Federal Law, there is a system called Chapter Nine for cities and other municpalities to declare bankruptcy.   There is an established procedure and mechanism.   Apparently, when a municipality declares bankruptcy, it has greater leeway than a corporation in shedding pension obligations, tearing up labor contracts, protecting assets, and devalung or wiping out bonds.

Until recently, Washington State's WPPS (WHOOPS!!!) was the benchmark public utility/quasigovernmental bankruptcy.  Since then we have seen them happen in Southern California when times were good (bad investments in the their pension fund, as I recall) and now we are having cities file them.   What is really worrisome is not the limited number of municipalities that are actually filing, but the large number of towns, cities, special entities (like government chartered public utility districts) and counties that are quietly (and desperately) studying doing so.    One Wall Street analyst this month is quoted as saying the municipal bond market could see more than a trillion dollars in bad debts.  In defaults.

And now there is quiet discussion by members of both political parties (this really is not a left vs right issue) that are talking about clearing a way for states to declare bankruptcy.
Unfunded pension plans are one reason for the terrible state of many governmental entities' finnances.   The costliness of the labor contracts that governments have been making with unions falls second.   Other spending - education, transportation, health care, housing, and so on - comes in third on the list of causes.   No politician wants to raise taxes, particularly in the current economic enviroment.   

There are political ramifications to all this, but let's try to avoid the liberal vs conservative, Dem vs Rep stuff for later.
Here are some of the impacts of widespread impacts of a wave of municipal bankruptcies and some state bankruptcies  would have -
All governmental borrowing would increase greatly in cost, from school districts to federal bonds.
Corporate borrowing costs and home interest rates would increase in cost, rates would go up.
The US dollar would be hit hard, as international faith in all American governments would be hurt badly.
Inflation would kick up, hard.
The economy would be buffeted.   American exports would pick up, since they would be relatively cheaper from the weaker US dollar.  But oil, raw materials, and other imports would be much more expensive.   That would be another hit to kick up inflation.

Inflation once upon a time was a godsend for people who owed fixed payments - those who had to pay on mortgages or bonds, those who had to pay pensions, those who borrowed money and then had to pay it back.    Nowadays, most pension contracts with unions have some sort of cost of living escalator built in.   Many mortgages are not fixed rate.   So inflation in and of itself (essentially, a devaluation of the dollar over time) is not enough to get municipalities out of debt.  Given the spending obligations - some of which are enshrined in some states' constitutions - the problem is not of the "one time" variety.  It is structural, it is institutional, it may be fully built into the modern system.  California, for instance, was in very bad finnancial shape before the "Great Recession".   The current economy has brought problems to the fore sooner, it has acted as an accelerator, but it is not the cause.

So what other impacts would a wave or tidal wave of governmental bankruptcies cause?   Should states be allowed to declare bankruptcy?  Would you right now invest your money in a bond from the State of California or the City of Seattle or the Boston Transit System or would you rather put it in gold, Ford or microsoft stock, or in a Swiss bank?   Should states, counties, school districts, cities and everything else be forced to double or triple taxes as needed to pay off their (perhaps unwise) obligations?

[EWSoccer64]

A rosy outlook published in the Finnancial Times (FT to English1) by one of President Obama's former finnancial advisors.

>>>>
Please respect FT.com's ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email ftsales.support@ft.com to buy additional rights or use this link to reference the article - http://www.ft.com/cms/s/0/10612eec-24cc-11e0-a919-00144feab49a.html#ixzz1BdkgkjXp


America must brace itself for turbulence
By Peter Orszag

Published: January 20 2011 22:51 | Last updated: January 20 2011 22:51

America is experiencing the hard slog of recovering from the financial crisis. Prospects have turned more positive over the past two months. But a year ago growth was picking up too – and then it stalled, at about the same time Greece’s fiscal problems infected the global economy. The question now is whether a home-grown fiscal crisis could derail this year’s rebound.

Some analysts have reached dramatic conclusions, suggesting the near-certainty of hundreds of billions of dollars in government defaults within the US over the next 12 months. Such predictions will undoubtedly turn out to be substantially overblown. Yet the rejection of one extreme is not the affirmation of the other. International investors would be wise to pay close attention to fiscal trends within the US.

EDITOR’S CHOICE
In depth: US downturn - Dec-05.Analysis: On their heads be it - Jan-03.Opinion: It is folly to place all our trust in the Fed - Oct-18.Alan Greenspan: Fear undermines US recovery - Oct-06.Martin Wolf: Obama was too cautious in fearful times - Aug-31.Fresh angles to meet recession - Dec-22..The severity of fiscal risk varies considerably depending on which level of government is under discussion. At the federal level the combination of ongoing weakness in the labour market and large structural budget deficits means that the right policy mix should be more stimulus now and much more deficit reduction, enacted now, to take effect in two to three years. Policymakers have acted on the first part, most prominently through the payroll tax holiday announced in December – one of the factors making the short-term outlook more promising.

They have not, however, undertaken the harder work needed to reduce projected deficits over the next decade. Most fundamentally it is difficult to see how the medium-term federal deficit can be reduced to sustainable levels without additional tax revenues from those earning less than $250,000 a year. And yet it is equally difficult to see the political system embracing that reality without being forced to do so by the bond market.

If policymakers will not act before we have a fiscal crisis at the federal level, a fiscal crisis we will ultimately have. Until then we will see a microcosm of this broader problem arise dur­ing debate about increasing the federal debt limit, later this spring. This?will?be contentious. We may have to experience some temporary market turbulence before it is resolved.

At the level of state governments, revenue remains more than 10 per cent below pre-recession levels. Public pensions are also significantly underfunded, leading to well-publicised concerns about debt defaults. As a recent paper from the Centre on Budget and Policy Priorities correctly argues, states will have to take immediate and painful action to reduce their operating deficits, while also gradually closing their pension gaps. Outright defaults are not likely, but these fiscal problems require concerted effort and political will, especially in larger states such as California and Illinois. This will impose some macroeconomic drag on the US economy as taxes are raised and spending is cut.

Facile analogies to indebted European countries, or the US mortgage crisis, however, are both misplaced. Although comparisons of debt across different levels of government are fraught with difficulties, US state debt levels are nowhere close to those of Greece. Debt service obligations are similarly much lower.

Unlike in the mortgage crisis, state debt has not generally been repackaged into opaque, complex securities. Furthermore, and contrary to what many pundits suggest, state governments cannot simply declare bankruptcy. Bondholders are also privileged creditors in almost all states. It is thus difficult for states to default: they would generally have to stop paying employees before they stopped making debt payments.

At the local level, however, the situation is different. Many US cities can declare bankruptcy – and given their numbers a severe crisis in at least one major city is both feasible and quite possible. As a thought experiment, take the top 30 or so cities. Assume any one has only a 2 per cent probability of a severe problem. Then the probability that at least one experiences a crisis is almost 50 per cent.

In such a city-level crisis, the state government could help – as has already occurred in Harrisburg, Pennsylvania. States would be wise to consider in advance their options in this kind of crisis scenario. But even if the relevant state government decides not to step in, and a city is forced to default, the direct macroeconomic consequences are unlikely to be substantial – unless that default triggers others to follow. In this scenario the possible contagion effect among investors in the debts of different cities is a crucial consideration.

The bottom line is that there may well be US public debt tremors this year, both during federal debate over raising the debt ceiling and with at least a limited number of crises in local and city governments. The bigger problem, though, lies beyond 2011, as the unsustainability of the federal government’s fiscal trajectory becomes increasingly clear. I hope it does not ultimately require a crisis to restore fiscal sustainability at the federal level, but I fear it will.

The writer is a vice-chairman of global banking at Citigroup and former director of the US Office of Management and Budget under Barack Obama
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[EWSoccer64]

The author the previous piece makes certain assumptions that are not valid, are questionable, or are already being overtaken by events-
1.  He puts - for the purpose of the article - the chances of each one of the big US cities going bankrupt at an individual level of 2%.   In reality, it is much, much higher than that for certain cities.  Detroit is discussing closing HALF of its schools.  Camden New Jersey just laid off about 40% of its police and firefighters.
2.   He points to the Pennsylvania bailout of Harrisburg as an example of states intervening to bail out cities.   States like Michigan, New Jersey, California and Illinois not only may lack the political will to bail out cities, they most certainly lack the means.   California and Illinois are essentially bankrupt themselves.
3.  He totally does not allow for any change in the legal status of states, either by legislative or by judicial action.   Yet already members of both parties are exploring just such change.   And anyone who has ever followed American Jurisprudence knows that judges in this country can turn the law on its head just on a whim.   His strong statements about the extreme  unlikelihood of states defaulting/going bankrupt are well grounded in the current world.   And he still acknowledges the possibility of states defaulting on bonds.  Which would be at least a quasi-bankruptcy, at the very least.
4.  Written in the FT, this article is aimed to reassure a European Audience.  Coming from a former high level advisor to the President, now a high level, highly paid VP at a US Government owned ( in part) American bank, this is a means of unofficially "officially" addressing the issue while not having the US government "officially" acknowledge the issue.  This is the way that governments and finnanciers work, often times, in Europe and other places.  If the US Government officially denied the problem, it would be admitting that there is a problem, or the serious perception that there is a problem.
5.   The author of the piece did everything he could to seperate the last finnancial crisises where contagion occurred.   Contagion is exactly what it sounds like.  The contagion that has most recently happened actually started in Iceland, then went dormant as the US financial house melted down because of contagion in the mortgage and derivative markets here.   It started up again, first with rumors and fears about the Baltic states and Eastern Europe.   Then Greece imploded finnancially on the bond markets as it became apparent that the Greek government had been cooking the books for decades.   The genie was out of the bottle.   The contagion - the fear that the national governments could no longer continue to pay for their ever increasing bond issuances - spread to Ireland.  Ireland had not been cooking the government books, instead they had promised full support to their banks who were underwater because of a burst housing bubble.   The Irish government did not want to take an EU bailout, but was forced to (and the subsequent consequences) by other EU countries.   Next on the list is Portugal, with tremors already hitting Spain.   Belgium is on the list.   So is Italy.     In Europe, CONTAGION is a dangerous, dirty word, one that is scaring people and toppling governments....
6.  In his comparison to the European debt crisis, the author accurately points out that the debt levels (% wise) are not at the levels of the European nations in trouble (in most cases, at least).   That is true.  However, he falsely claims that the ability for the American municipalities and states to increase their revenues (taxation) is suficient to meet the debt load and structural deficits because of that.   This is not a true statement.  No city, country or state (let alone a PUD or School District or such) has the taxing ability of the national government.   And not just because of laws that prevent that.   The risk of capital flight (as the city of London has seen) is very real.   What would Microsoft do if King County started taxing it an additional $1 billion a year?  C-YA!!! What would the Washington based Alaska fishing fishermen do if they had to suddenly pay twice as much business taxes and a state income tax?   Move to Homer, Valdez, Sitka, Portland, Astoria, etc.   
    The point is that it is rather easy to move (bye, bye Boeing HQ) in this country from one city to another or one state to another, as people and as companies.   Communities with healthy finnances, that had restrained spending, will suddenly end up as boom towns (The Tri-Cities has a 1% vacancy rate in apartments and rentals right now because of all the people flocking into the community because the local economy is in comparatively great shape.   And one reason that it is, is because of restrained taxing and spending policies when times were better.)
Other places in this state are seeing rent decreases and high vacancy rates.    Paint that picture large, on a national scale.


Does anyone else have a different take on this?

[EWSoccer64]

And in todays NY Times, they talk about the issue of states going bankrupt and of contagion.

http://www.cnbc.com/id/41189172

[EWSoccer64]

Lower debt ratings mean higher borrowing costs.   What state is going to be the first to have "junk bonds"?

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Downgrades loom for US states
By Nicole Bullock in New York

Published: February 17 2011 05:01 | Last updated: February 17 2011 05:01

Cash-strapped US states and cities face the prospect of downgrades after Fitch Ratings changed the way it analyses their burgeoning pension bills.

In a report published on Thursday, Fitch warns the new approach could lead to “limited negative rating action”, particularly for local governments with big wage bills. The changes to the way it assesses pension liabilities come amid growing concern over the scale of municipal debt problems and the effect on state and city finances of generous, unfunded public sector pension schemes that will run for many years. Sharp falls in equities and other risky assets during the financial crisis reduced the funding levels of nearly all these pension plans, increasing the pressure on states and local governments when they have even less cash because of dwindling tax revenues to make up the shortfall. Revenues have tumbled while spending has been rising.

EDITOR’S CHOICE
In depth: US states of emergency - Feb-17.In depth: The pensions crisis - Feb-17.US public pensions face $2,500bn shortfall - Jan-17.Lex: Rates and pensions - Oct-31.US public pensions face day of reckoning - Oct-31.Build America Bonds’ success continues - Oct-26..“The key questions are whether states and local governments are funding their pensions, how much it is taking up of their general fund and concern about the crowding out of spending for other needs,” said Laura Porter at Fitch.

The rating agency, which used data from 2009, said there was cause for near-term concern about “a number of” pension plans and pointed to the “considerable pressure that these obligations will place on many government budgets”. The greatest risk would come at the local level since labour-related costs were a higher percentage of local government budgets, Fitch said.

In Miami, Florida, a quarter of the city’s operating budget pays for pensions. Among states, Illinois stands out for setting aside 12 per cent of its budget for its chronically underfunded pension.

In valuing pension liabilities in its credit analysis of states and local governments, the rating agency will now assume a return on assets of 7 per cent, lower than the average return of 8 per cent used by most pension plans. That translates to an increase in the average plan liability of 11 per cent.

Using the 7 per cent rate does not shift any plans from being adequately funded, which Fitch considers to be assets equal to 70 per cent of liabilities, to “weak”, or under 60 per cent. However, plans in Montana, Hawaii, Vermont and New Jersey are among those whose funding ratios fall under 60 per cent using Fitch’s assumptions.

The Illinois State Employees Retirement System is the weakest at 37 per cent, compared with 44 per cent using its reported 8.5 per cent assumed rate of return.

A hypothetical 6 per cent assumption, however, would drag plans in Nevada, Massachusetts and Minnesota from adequately funded to weak ratios.

For state-run plans that also cover local workers, Fitch said it is difficult to assess how much of the liability is the obligation of the local government because plans typically do not provide this breakdown. That can overstate states’ obligation and understate what local governments owe.
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[HandBall]

Thought I'd share a pension story from California.

State employee. Started working at 24. Under the state's pension system, he was able to retire at age 50, receiving a pension equal to 3% of his maximum salary per year of service. In his case 27 years. So he will receive 81% of his maximum salary of $124,000 for the rest of his life. And since he retired at age 50, that could be 30 years earning $100,000 a year indexed for inflation. Or roughly $3 million in pension benefits if he lives to age 80, or about double his combined earnings for his entire career in his government job 'serving' the people. Now the taxpayer will service his very comfortable retirement for decades.

That is what public employee unions are fighting to retain at the direct cost to the taxpayers. That is what Marxist AFL-CIO president Richard Trumka is agitating for in Wisconsin today, and what Obama has issued an executive order to support with the formation of a Community Organizing agency in the White House.

[Left Foot]

Thought I'd share a pension story from California.

State employee. Started working at 24. Under the state's pension system, he was able to retire at age 50, receiving a pension equal to 3% of his maximum salary per year of service. In his case 27 years. So he will receive 81% of his maximum salary of $124,000 for the rest of his life. And since he retired at age 50, that could be 30 years earning $100,000 a year indexed for inflation. Or roughly $3 million in pension benefits if he lives to age 80, or about double his combined earnings for his entire career in his government job 'serving' the people. Now the taxpayer will service his very comfortable retirement for decades.

That is what public employee unions are fighting to retain at the direct cost to the taxpayers. That is what Marxist AFL-CIO president Richard Trumka is agitating for in Wisconsin today, and what Obama has issued an executive order to support with the formation of a Community Organizing agency in the White House.

It would be great if you could share the citation for this very interesting story. Is it normal for folks to retire at 50? Many military folks get pensions as well. Should that practice be stopped?

[El Matarife]

Thought I'd share a pension story from California.

State employee. Started working at 24. Under the state's pension system, he was able to retire at age 50, receiving a pension equal to 3% of his maximum salary per year of service. In his case 27 years. So he will receive 81% of his maximum salary of $124,000 for the rest of his life. And since he retired at age 50, that could be 30 years earning $100,000 a year indexed for inflation. Or roughly $3 million in pension benefits if he lives to age 80, or about double his combined earnings for his entire career in his government job 'serving' the people. Now the taxpayer will service his very comfortable retirement for decades.

That is what public employee unions are fighting to retain at the direct cost to the taxpayers. That is what Marxist AFL-CIO president Richard Trumka is agitating for in Wisconsin today, and what Obama has issued an executive order to support with the formation of a Community Organizing agency in the White House.

I'm failing to see the issue here.  If he worked for a private company his salary would have been higher and he would have had a 401k.  If you don't like paying taxes, don't pay them.  I also love that "serving" is in quotes.  What do you think government employees do all day, sit around and laugh at you private sector folks?  My parents both work in public health and do more in a day that 99 percent of the private sector employees I know.

And just FYI, I'd bet dollars to donuts that if you were a government employee you would be singing a different tune.