Monday, January 24, 2011

Can/Should/Will States File Bankruptcy?

This is going to get ugly.  Let me say up front that the biggest problem facing State over-spending and massive budget deficits is the public employee benefit entitlement programs in place.  And this is where it will get the ugliest.  I will also say honestly up front that it is my view, based on first-hand knowledge of the incredible scope and size of benefits awarded to State employees that this is where the budget scalpel needs to fall the hardest.  Just as one example:  the Superintendent of the Aurora Public School System in Colorado - only the 5th or 6th largest district in the State - earns $750,000/year in salary and benefits.  This includes both his military benefits AND his current compensation.  To say that this kind of pay for someone like this is absurd would be an understatement.  It's an egregious insult and non-punishable crime to the Taxpayers.  That example may seem extreme, but in general any tenured State/Federal employee can retire after 20 years and take another job AND collect all the benefits from their previous job.  I personally know some doing that.  The bottom line is that these kind of benefits/entitlements do not exist in the private sector other than for the over-priveledged upper management.

The average compensation, including benefits, for the public employees was over $108,000/yr. vs. just under $69,000/yr for that of private sector workers.  This was for 2008.  I'm sure the disparity is even wider now.  Here is the source article for this data:  LINK.  I don't know about anyone else, but I find this to be beyond absurd.  Unfortunately for the privately employed taxpayer, who can have his employment and benefits terminated when a Company needs to cut expenses, the Government rarely pares its expenses and the associated benefits of all workers are Constitutionally guaranteed in most States.

The only possible mechanism for changing the public employee compensation/benefit scheme would be to permit States to file bankruptcy, which is currently not allowed by law.  This article in the NY Times discusses the current status of this issue as it enters into the debate arena on Capitol Hill:  LINK

The fact of the matter is that most States are running big spending deficits - and some like California and Illionois are technically insolvent - and the cost of the public workforce is the largest expense burden.  Even in the rosiest economic scenarios, the current system is not sustainable and it will require some drastic expense-cutting measures.  Of course, unless the system can be restructured to enable the Federal Government to ramp up its money printing and monetize State deficit/debt burdens, the only viable alternative is to legislate the ability of States to file bankruptcy in order to extinguish and restructure their obligations.  This will require a lot of pain to be endured by those dependent on the State for cash flow.  Two of the biggest consituents of this are public employees and municipal bondholders.  The most equitable solution would to require substantial sacrifice by both.

Unfortunately, the likely path of legislation will create a mechanism which will shift the States' burdens onto the Federal Government.  The NY Times article linked above hints of this possibility. Ironically, the person in the article who represents the public employee special interest group uses the GM bailout as his model for Federal involvement.  But recall that GM was made a ward of the Taxpayer and, despite issuing stock in a quasi-privatization of sorts, is still dependent on Federal guarantees.  Most people do not realize this, but the Government subsidizes every lease issued to finance the purchase of GM vehicles.  In other words, the GM bailout is a horrific model to use in order to create a mechanism for reorganizing State insolvency because it would involve shifting State insolvency onto the Federal balance sheet - a mere rearrangement of the deck chairs on the Titanic.

The bottom line is that public employee compensation needs to brought into line with that of the private sector.  I fail to see any reason whatsoever as to why public sector workers are awarded such a rich premium to the private market for their labor services.  At the same time, those who have financed spending at the State level - i.e. muni bond investors - should also be required to take restructuring haircuts on their investments, which would be the free market solution for sloppy investment due diligence.  The path for this solution would be to allow States to file bankruptcy using the same model applied to corporations and private individuals.  After all, can anyone out there give me just one good reason why the above two constituents should be exempted from the discipline of the (relatively) free market to which the rest of us are exposed?


  1. Dave, I think your free market solution would be a wonderful fix to this problem. Unfortunately, as you're all too aware, there hasn't been a free market in the U.S. for decades and they're not going to start one now. There's no way PIMCO, along with all the other pensions, insurance companies, mutual funds, etc. are going to allow their massive muni holdings to take a haircut. They own Congress and they'll pull all the strings they need to, to make sure this doesn't happen. On the other hand, I can see the union contracts getting restructured, which definitely needs to happen.

  2. For sure there hasn't been a free market in this country for many years, which is why I wrote "relatively." lol Having said that, there is a "private" market solution to reorganization from insolvency and the private sector of the system is subjected to a different standard than that of the public sector. Obviously the playing field should be levelled.

    Will it? Not if you believe, like I do, that our system is going down the "Atlas Shrugged" road. And I'm shrugging (and buying gold/silver/mining stocks and getting as much "off the grid" as possible)

  3. Oh my aching Dollar :)

  4. Was going to make a snide comment along the lines of, “what free market?” but you already beat me to that one.

    Is the Aurora Public School System a state-level or a county-level entity? If states will be permitted to declare bankruptcy, will this, in turn, also cover the counties, i.e. permit them to do so as well?

    More anecdotal evidence re: the unsustainability of the status quo:
    In Friday’s local newspaper there was an article about the need for yet another tax increase at the county level. The gist was that they have nine more full-time employees than is needed for the current enrollment level; however the contract with the state workers’ union does not permit laying people off during the academic year.

    So in order to pay for employees the school system doesn’t need, we local taxpayers – many of whom are already being financially squeezed these days – are going to be handed a tax increase.


  5. That's incredible Mammoth. This is just like Atlas Shrugged. The private sector working for the benefit of the public sector employees.

  6. Dave,
    Allowing states (cities and counties as well?) to declare bankruptcy may sound like a good idea on the surface. However, what worries me is that, once relieved of the burden to cut government spending, the respective state legislatures may conclude they can start the party all over again!

    Similar to an individual who uses bankruptcy to wipe out all his debts, then goes on a spending spree.

    Like the old saying goes, "Be careful what you wish for."

  7. When an individual declares bankruptcy his debts don't diosappear magically and harmlessly. If you have ever been on the losing end of a bankruptcy you know the truth is it is YOU who pays. We can tolerate hundreds of thousands of deadbeats going bankrupt every year because we all pay more to retailers and lenders to cover that cost. WHO will cover the cost if California simply goes bankrupt and refuses to pay debts and honor contracts??? California will get a new lease on life and continue their incredibly wasteful ways (you know they will) so in a few years they will be bankrupt again. Who pays???? There is no free lunch. The ONLY correct answer is to not allow them to go bankrupt and to hold them to the law which requires them to live within their budget and force them to change their spending habits.

  8. yeah, no doubt this whole situation is bad, unsustainable, and just plain unworkable.

    Yet, I should point out that many public sector employees were lured into the public sector by promises of lower pay, but significant retirement benefits. In other words, unlike the private sector who pays better now and more poorly later, the public sector tends to pay poorly now with the promise that you'll get more later. so these people were bargaining for deferred compensation and safety in their later years. these people (at least from my experience) don't know much more about economics or finance than your private sector employee; in fact, from my experience, they tend to know much less.

    does that change the situation on the ground? as far as sustainability, no. but as far as dealing with the decades of contractual promises, it leads me to believe they'll monetize, and probably should. but what does it really matter, as you've noted, our system is based on robbing peter and paul, to pay queen mary :) (sorry, couldn't resist).


  9. It is all just part of the plan for the stupid people. First you let the states take on unsupportable debts from money printed at the people’s expense which you syndicate to pension funds. Then you put the states into re-organization and raid the states pension funds by stopping the payments and cut down workers salaries using the proceeds over the next 20 years to pay off the bank debt.

    Of course the pension funds can’t “for risk and legal reasons” take part in the restructuring that occurs but the bankers with their limitless sources of printed money can. The rates on the municipal debt spreads owed rises to 5-7 % to “reflect the risk” and 6 or 7 years down the road the banks get all the printed money back effectively from the states pensioners and it’s workforce.

    The people’s assets in the pension funds run by PIMCO are of course now worth 5 or 10 cents on the dollar after the re-organization. Meanwhile because of the “crisis” all the assets like the roads and the sewers will be sold off for 10 cents on the dollar to “our crowd” as Jim Seligman calls them. From now on in you are left as debt peons with “our crowd” as your new feudal masters. Because you are all so stupid you call this system a “free market”.

    To divert attention away from the reality, provocateurs start arguments trough the media and the internet about the cents being obtained by one group of peons over another. Look these peasants are earning more these peasants why don’t you argue about that, not what is happening to all the real assets like your roads and pension funds.

    This is called doing a Michael Milliken on the public sector because “our crowd” already owns all the private assets and the public sector is “the last frontier”. Guess why they get paid more than the private sector. Previously of course before “our crowd” took over the private sector, the private sector used to get better paid, but not today.

    At the moment the US has very nearly reached Indian levels of income distribution and “our crowd” has managed to institute a modern day religious caste system in this country. With this new change in the states control the US will fall to Kenyan education and income distribution levels. If you think this change is going to bring prosperity I guess you should take a short break in Africa while your dollars still buy airplane tickets.

  10. I do believe the totally free industry remedy would have been a fantastic repair for this issue. Sadly, because you might be very conscious, presently there wasn't a free of charge industry inside the Ough.Azines. for many years and they are not necessarily planning to commence a single right now. There is no approach PIMCO, in addition to all of those other retirement benefits, insurance firms, shared money, and so on. will permit their particular enormous muni holdings to consider the new hair-do. They will very own Our elected representatives and they're going to take all of the guitar strings they have to, to be sure this won't take place. Alternatively, I can tell the particular marriage agreements acquiring updated, that certainly has to take place.