Broke States Filing Bankrupcty: Another Sacred Cow Up for Slaughter

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When private companies or individuals go bankrupt, it affects those company employees and households.  When States threaten bankruptcy, it becomes a public problem.  How?  Where else do you think States will get money? From the sweat of your brow.

401(k) plans plummeting, home equity nest eggs cracked, Social Security underfunded and now the sacred cow of guaranteed state pensions up for slaughter...what's next for the common American worker?

Yesterday morning, I shared some ideas with Fox Morning Shows across the country and banter some solutions with their hosts.

Consider these few facts:

  • 46 out of 50 states facing major financial problems
  • 11 states reporting mid-year shortfalls for current fiscal year
  • Illinois facing $60 billion pension liability and $17 billion current fiscal year (2011) deficit
  • A recent CBS poll showed that 77% of voters what government to cut spending to solve the budget deficits

Here are some of my notes and snippets taken from a recent New York Times article.

Bond Markets:
For now, the fear of destabilizing the municipal bond market with the words "state bankruptcy" has proponents in Congress going about their work on tiptoe.

States may look to paying a premium in higher borrowing costs for a state and downward pressure on the value of its bonds.  Individual bondholders would not realize any losses unless they sold.

The largest purchasers of bonds are institutional investors and insurance companies.  Institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital and reserves. They might retreat from additional investments into bonds and look into alternatives.  Curious to see if this may affect higher costs in car, home, life and health insurance policies.

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.

Possible to envision how bankruptcy for states might work by looking at the existing law for local governments, called Chapter 9.  It gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state's bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

Discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

GM (General Motors) was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.
Congress now more conservative considering that states would start lining up for federal help.

To Unions and Retirees:
Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.

What an unfortunate scenario it would be that retired persons with a state pension would one day see no more guaranteed checks as they were promised years ago.

What to Do?

  • Saving/Investing for your financial future needs to start now, so get your budget in order and find the leaks.
  • First invest in financial education, then immediately find a partner, mentor or associate to keep you accountable.  This is an ongoing process.
  • Decide on what lifestyle you want to maintain.
  • Give n' Grow - Take action by investing by planting the seeds of your greatness TODAY. ...Bottom-line alternative is depend on the government plan OR depend on your plan! 

Money Smart Guy appearance on Fox News Radio Tour for Monday, Jan 24, 2011 (courtesy of the Money Smart Guy's Official PR firm - Goldman & McCormick <---AWESOME guys!!):

KURV McAllen, TX
WSFX Ft. Myers, FL
WHAS Louisville, KY
WOC Davenport, IA
WOWO Fort Wayne, IN
WSYR Syracuse, NY
WIMA Miami, FL
KCMO Kansas City, MO

WTAM Cleveland, OH

and WDUN Gainesville, GA

Thank you Fox News Radio!!

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