On Thu, 15 Apr 2010 18:51:39 -0400, Wes
wrote:
snip
What I'm really interested in is can a state or city declare bankruptcy? Government
pension obligations are another ticking timebomb.
snip

Indeed and the ticking is getting louder.

I am not an attorney, but under current law, counties and
municipalities can indeed declare bankruptcy under title/chapter
9 of the bankruptcy code, and several have done so, e.g. Orange
County California.
http://www.uscourts.gov/bankruptcyco.../chapter9.html
http://www.la-par.org/Publications/P...Bankruptcy.pdf

Note that some states have enacted legislation preventing their
counties and municipalities from declaring bankruptcy without the
permission of the legislature [which is never given].

It does not appear under current law that a state can use the
bankruptcy process as these are legally sovereign, albeit
subordinated to the Federal government, although this is subject
to change with the stroke of a pen on a judicial decree. Another
possible outcome would be a change in the name of the process
from bankruptcy to conservatorship, ala the GSE operations such
as Fannie and Freddie, which may avoid triggering the CDS
derivatives.

The major problem is that the bankruptcy process was never
intended to "fix the problem," for local governments but rather
to provide some "breathing room" while a solution was devised and
implemented. There appears to be no provision for some sort of
chapter 7 liquidation of a governmental entity with total removal
of existing officials and employees, seizure of assets,
abrogation of contracts, etc. so the problems simply continue to
fester and grow, even with a debt repayment "time out." Detroit
Michigan, New York, New Jersey, and Pennsylvania are examples.

The base problem appears to be the continual evasion of [state]
constitutional prohibitions on running a deficit, and the total
denial by the politicians, functionaries and apparatchiks of the
fact that the money to sustain, what they perceive as, critical
and necessary public spending is simply not there and in fact
never was.

This is not a "new" problem, but one that dates back to at least
the 1970s with the deindustrilization and [productive] population
loss of the affected areas. Again, Detroit is a poster child. In
the early 60s Detroit had a population in excess of 2 million,
with considerable productive [tax paying] industry. Currently
the population is less than 800,000 [and falling] and [most]
industry has left, yet municipal Detroit is attempting to
maintain the same numbers of police, fire, school teachers,
governmental administrators, existing governmental programs,
pensions, etc. It can't be done.

It appears under ERSIA and the PBGC, some of the pension
obligations of these local/state governments may fall back on the
American taxpayers in the case of bankruptcy/conservatorship, at
least up to the PBGC limits. It all depends how the state/local
governmental pension plans are legally structured and controlled.
FWIW -- it appears that many of these plans have been "skimmed"
and "looted" just like the private pension plans.


Unka George (George McDuffee)
...............................
The past is a foreign country;
they do things differently there.
L. P. Hartley (1895-1972), British author.
The Go-Between, Prologue (1953).