12 March 2013

Who Says We Don't Need State Bankruptcy?

I've posted here, here, and here about the prudence of amending the Bankruptcy Code to permit the several States of the United States to reorganize their financial affairs under the supervision of a bankruptcy court. The causes of the financial woes of various states differ in some respects but as far as I know each has one gigantic problem in common: unfunded pension (and retiree medical) benefits.

If there was any doubt about the looming effects of this problem one need only to read the news account here about Illinois's settlement with the Securities and Exchange Commission. It seems that Land of Lincoln was not forthright about its dire pension situation with purchasers of its bonds. The SEC charged Illinois with securities fraud and the two parties simultaneously announced a settlement that doesn't require the State to pay a fine or penalty. Not much good for the snookered bondholders but the SEC's rationale for its slap on the wrist is that Illinois's taxpayers would pay any fine, which doesn't rectify the problem.

What is the long-term solution to the chronic underfunding of Illinois's pensions? As a practical matter there are only two: put more money in the pension pots or reduce pension payouts. The former has been taking place to a limited extent for the past several years but the latter, according to the more in-depth article in The Wall Street Journal (behind paywall here), "has remained elusive." If Illinois and its current and retired workers can't come to an agreement, default or State-level bankruptcy are the remaining alternatives. Congress should at least give the States the option to seek bankruptcy relief.

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