Actuarial Outpost
 
Go Back   Actuarial Outpost > Actuarial Discussion Forum > Finance - Investments
FlashChat Actuarial Discussion Preliminary Exams CAS/SOA Exams Cyberchat Around the World Suggestions

Browse Open Actuarial Jobs

Life  Health  Casualty  Pension  Entry Level  All Jobs  Salaries


Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

Reply
 
Thread Tools Display Modes
  #411  
Old 06-19-2017, 11:19 PM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 77,243
Blog Entries: 6
Default

[i can't remember if I linked this already]

http://www.wirepoints.com/would-cong...ints-original/

Quote:
Would Congress Authorize Bankruptcy for Illinois and Other States? Yes, Inevitably. - Wirepoints Original

For Illinois or another state to formally go bankrupt, the United States Congress would have to pass legislation.

Would they? I think so. In fact, bipartisan support is reasonably foreseeable and, ultimately, that legislation is unavoidable, which will trump any debate.

The legal question whether Congress could extend bankruptcy to states was addressed in my earlier article so I won’t rehash that here, except to say I think David Skeel is right. He’s a law professor at the University of Pennsylvania who also serves on Puerto Rico’s oversight board in its bankruptcy-like proceeding authorized by Congress under PROMESA. He wrote firmly that the “constitutionality of bankruptcy-for-states is beyond serious dispute.”

In Congress, reasons will vary for initial political hostility to bankruptcy-for-states.

Some conservatives view state bankruptcy as a form of bailout and will be particularly averse to helping Illinois, which they understandably think deserves its fate. Others may view it as federal intrusion on state sovereignty, which is also what the constitutional objection is about.

But bankruptcy is really the anti-bailout alternative, and turning Illinois around is important to the national economy. We are now a drag on the national economy despite assets that should make us a powerhouse of jobs and production. Illinois GDP has lagged the nation’s significantly for ten years. A federal bailout is happening automatically, at least in a small sense, in the form of food stamps, housing assistance, Medicaid and similar programs. A fresh start for Illinois would reduce its federal tab for those costs and grow Illinois’ tax base for federal revenue.

Respecting state sovereignty, remember Congress would only be offering states the option of using bankruptcy, just as it has already done for municipalities; nothing would be forced on states.

The left will fear the power of bankruptcy to reduce pension payments, but it’s essential to remember the Bankruptcy Code would not be expanded “as is” to states. Changes would be made on which all sides should find common ground.

One such change should allow for progressivity or means testing in some form for any pension cuts. That is, the fat cats should be reduced proportionately more than smaller pensioners who truly need their annuity. The Bankruptcy Code currently treats all unsecured creditors uniformly, including unfunded pension liabilities.

Another possible change that progressives might like is statutory recognition of the concept of “service insolvency.” That’s the idea that failing to provide basic services should count in the initial determination whether a government qualifies for bankruptcy.

The left wouldn’t like how collective bargaining agreements can be terminated along with all other contracts bankrupt parties don’t like. But remember that state policy on collective bargaining and other labor matters is not dictated by bankruptcy. A bankrupt government can opt to keep or renegotiate whatever labor contracts it has.

The municipal bond industry will object fiercely since unsecured debt could be reduced. They’ve already focused on the issue, having earlier sponsored a national ad campaign opposing PROMESA, fearing it would set a precedent for states.

But progressives and free marketeers alike should shed no tears for existing bondholders. They took the risk that bankruptcy law could be changed to impact them.

All will fear higher future borrowing costs. That’s legitimate but finite. Once a bankruptcy proceeding is underway, new lenders get special protection to assure normal operation and, assuming a successful bankruptcy, a clean balance sheet and better credit ratings result. The key will be to line up support for federal legislation as best as possible behind the scenes and move very quickly once it’s proposed.

Won’t all states suffer higher borrowing costs because of the additional risk? In the very long run they will be forced to borrow less to assure the markets of no risk of getting near bankruptcy. Is that such a bad result?

Stop here and assume everything I’ve said so far is wrong. Assume still further reasons why bankruptcy is a bad option — it will be fraught with unknowns and is inherently unfair to those to whom promises were made, which is true.

None of that will matter because it will become evident there’s no alternative. This isn’t about whether bankruptcy is a good option. It’s about whether it’s the only option.

Look no further than pensions to see why. The Illinois Supreme Court has made crystal clear that, under the Illinois Constitution, pension promises can’t be cut for services already rendered, which are Illinois’ $130 billion liability (using silly, official numbers). That leaves only two means to do that — bankruptcy or a state constitutional amendment deleting the pension protection clause. But the amendment might not work anyway because of issues under the United States Constitution, and it would take years to put through even if the General Assembly acted to put it to a public vote, which it has shown no interest in doing.

And the unfunded pension obligations are insurmountable in themselves. That’s why no serious proposal by anybody in the current budget debate has pretended to address those liabilities. They all propose continued annual contributions to the pensions that underfund them, growing the pension debt each year.

Meanwhile, despite that underfunding, Illinois’ death spiral worsens. The tax base shrinks, state revenue drops, people and employers flee and services are cut.

Bankruptcy for Puerto Rico was initially scorned, but PROMESA ended up with bipartisan support, passing 297-127 in the House and 68-30 in the Senate.

One part of their experience is worth particular note. Lawsuits by creditors were stayed — basically, put on hold — under PROMESA. That stay expired on May 1 and a torrent of lawsuits began on May 2, forcing Puerto Rico to file its bankruptcy-like proceeding the very next day. It’s difficult to see how Illinois can avoid a similar wave of lawsuits at some point, and only an organized insolvency proceeding — bankruptcy — can fairly manage and prioritize an overwhelming number of claims.

The sooner we pass through the stages of ridicule and violent opposition, as Schopenhauer called them in that quote above, the less painful this will be for everybody.

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

ftr, I don't think bankruptcy for states will happen (by which I mean a process for states to go through bankruptcy via federal courts)

I do think states will default on various obligations.

These are not the same things.
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
  #412  
Old 06-20-2017, 08:15 AM
lulzEMH lulzEMH is offline
Member
 
Join Date: Aug 2011
Posts: 1,280
Default

Quote:
Originally Posted by campbell View Post
[i can't remember if I linked this already]

http://www.wirepoints.com/would-cong...ints-original/



ftr, I don't think bankruptcy for states will happen (by which I mean a process for states to go through bankruptcy via federal courts)

I do think states will default on various obligations.

These are not the same things.
Did they institute BK for Puerto Rico or was that negotiated defaults? I've seen comments similar to yours but never really sure what it means.

Does default mean that creditors get to pursue the State forever? Much like the hedge funds with Argentina? And they have to agree to a settlement vs BK the judge just tells creditors what they get and to f off? I assume the latter is much preferred if that is the case.

As part of my effort to be passive, I have a pile of muni close end funds, i've consistently been amazed how well they perform in spite of what seems to be an onslaught of municipalities on course for BK/default. If states can't file BK then maybe there is more long term recourse than I expected via BK.

edit: read the article you posted, it answered several questions but seemed to suggest that BK is the only good solution.

Last edited by lulzEMH; 06-20-2017 at 08:18 AM..
Reply With Quote
  #413  
Old 06-20-2017, 09:53 AM
campbell's Avatar
campbell campbell is offline
Mary Pat Campbell
SOA AAA
 
Join Date: Nov 2003
Location: NY
Studying for duolingo and coursera
Favorite beer: Murphy's Irish Stout
Posts: 77,243
Blog Entries: 6
Default

Quote:
Originally Posted by lulzEMH View Post
Did they institute BK for Puerto Rico or was that negotiated defaults? I've seen comments similar to yours but never really sure what it means.

Does default mean that creditors get to pursue the State forever? Much like the hedge funds with Argentina? And they have to agree to a settlement vs BK the judge just tells creditors what they get and to f off? I assume the latter is much preferred if that is the case.

As part of my effort to be passive, I have a pile of muni close end funds, i've consistently been amazed how well they perform in spite of what seems to be an onslaught of municipalities on course for BK/default. If states can't file BK then maybe there is more long term recourse than I expected via BK.

edit: read the article you posted, it answered several questions but seemed to suggest that BK is the only good solution.

Puerto Rico is a territory, and doesn't have certain powers/sovereignty that states do. It's not officially a Chapter 9 bankruptcy (but I forget what it is), and there's a congressionally-appointed oversight board... that would go over real well with a state.

It's really, really, really tough to sue states for money.

Obviously, I'm not a lawyer. There would be implications with the SEC if Illinois defaulted on its bonds. The SEC has dinged Illinois and New Jersey before for misleading disclosures (I will try to dig that up - I know I posted about it on the AO)

The big issue will be defaulting on pensions. They can try suing under the state constitution, or something re: 14th amendment... but again, it's hard to sue money into existence.

The main reason I don't see Congress doing anything re: state level bankruptcy is because it would be even more controversial than AHCA, and they can't even do anything with that.


-----
Let me drop the political/legal argument for now and address muni funds.

Not all munis are created equal, and that's definitely true of muni closed end funds.

Some muni funds have gotten burned of late because they larded up on PR debt as those had high yield. There was a reason those came with high yield.

But plenty of munis aren't distressed at all. And not terribly high yielding. So it really depends on which muni fund(s) you're in.
__________________
It's STUMP

LinkedIn Profile
Reply With Quote
Reply

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off


All times are GMT -4. The time now is 01:16 AM.


Powered by vBulletin®
Copyright ©2000 - 2017, Jelsoft Enterprises Ltd.
*PLEASE NOTE: Posts are not checked for accuracy, and do not
represent the views of the Actuarial Outpost or its sponsors.
Page generated in 0.22780 seconds with 9 queries