Some of the biggest U.S. states with the worst budget deficits on Friday rejected any federal help in the form of a bill that would allow them to file for bankruptcy — something they now are barred from.
Legislation that would allow U.S. states to file for bankruptcy will likely be introduced in Congress within the next month, Newt Gingrich, the former speaker of the House of Representatives who remains a powerful figure in the Republican party, told Reuters on Friday.
Because they are considered sovereigns, states are prohibited from declaring bankruptcy. Except for Vermont, all the U.S. states are required to end their fiscal years with balanced budgets.
The following are some of the comments on the expected legislation from state officials. Three of the states — New York, California and Illinois are among the biggest issuers of municipal bonds in the $2.8 trillion marketplace.
+ TEXAS – A spokesman for Governor Rick Perry, who chairs the Republican Governors Association and — like Gingrich — is considered a GOP presidential contender, said: “In Texas, the governor and legislators practice fiscal responsibility and are required by law to have a balanced budget, something that Washington should adopt.”
– “Bankruptcy should not be a bailout for states that have been poorly managed. Families across America have to live within their means, and state and federal government need to do the same.”
+ CALIFORNIA – Democratic State Treasurer Bill Lockyer said: “States didn’t ask for it. We don’t want it. We don’t need it.”
– “Bankruptcy would devastate states’ ability to recover from the recession and make the infrastructure investments that create good jobs. It would inflict severe injury on taxpayers.”
– “The people making this dangerous suggestion — and those who lend it credibility it doesn’t deserve — confuse states’ near-term budget deficits with long-term funding obligations. We are dealing with them by reducing benefits and increasing employees’ contributions, among other moves.”
– “With respect to our budget shortfalls, we have the tools to fix them without taking a wrecking ball to our economies and taxpayers.”
+ NEW YORK – Democratic New York State Comptroller Thomas DiNapoli said: “Proposals in Congress to allow states to file for bankruptcy are unworthy of serious discussion. Just the availability of a bankruptcy option and the potential bond default could severely damage state credit ratings and destroy the trust of bondholders.”
- “Floating a bankruptcy option is an irresponsible tactic meant to scare the public into believing that short-term budget issues are insurmountable. That notion is false.”
– “Our economy cannot withstand another crisis in confidence. Bankruptcy may be presented as an easy way for states to walk away from bad fiscal management, but easy solutions are rarely the best solutions to very difficult problems. The best way for states to address their fiscal difficulties is to align recurring spending and revenue, not renege on obligations.”
+ ILLINOIS – Democratic Governor Pat Quinn’s director of communications for the Governor’s Office of Management and Budget, Kelly Kraft, said: “We do not comment on hypotheticals. States cannot declare bankruptcy.”
If IL Gov. Quinn thought he could do it and wipe out all the debt so he and his greedy, corrupt lawmakers could rack up the credit card debt again, he would. Don’t even doubt it. They are all slime.
If GM and chrysler can file bankruptcy, why not Illinois? We have more debt than bot of those companies put together. BK seemed to work out OK for GM. they are back in business and selling cars and have issued stock. If congress changes the laws , States would be permitted to file for BK
Well… one of the denials was a lot weaker than the others…
There is no doubt that IL is going to declare bankruptcy.
I for one, have already defaulted on my 400k nightmare Chicago mortgage.
I have funded my own bailout. The politicians and corporate leaders will walk away with millions in pensions while we get scraps? Yeah, right.
I intend to live here for another year while I contest my foreclosure in court. 16 months and counting.
It is a race to the bottom, and I want to be below ground level.
Bankruptcy? Congress just wrote a huge check to the greedy investment bankers after they drove the economy off a cliff. They’re making billions again. I guess there’s no bailout for retired teachers.
Quinn should STFU. He arrived in Springfield claiming some kind of popular mandate to raise taxes, when in fact he won only THREE out of the state’s ONE HUNDRED AND TWO counties, and less than 50% of the overall popular vote.
He and his cronies in the Legislature rammed through a massive tax increase bill in a matter of HOURS – not even enough time for the average taxpayer to read and understand it.
Quinn is just another national embarrassment IL has to suffer with as Governor.
Why didn’t you quote Quinn’s “We’ll tax out way out of it.” And Zorn’s “It won’t hurt.”
FOLLOW THE COLORADO EXAMPLE: BREACH CONTRACTS, THERE IS NO NEED FOR A STATE BANKRUPTCY LAW.
WORSE THAN BERNIE MADOFF – COLORADO’S 2010 PENSION THEFT.
What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.
We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Governor Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the pension reform bill (Senate Bill 10-001) acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.
If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating? I can understand how an uninformed layman might see SB1 as an easy solution to pension under-funding; however, there is no excuse for the professional administrators at Colorado PERA to recommend a prima facie unconstitutional bill. It is stunning ineptitude.
The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.
Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.
PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. Expect a new lawsuit from these SB1 victims in the near future. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. That is outrageous. You print plan documents for your pension, and later state that the pensioners should not believe the documents you distributed? (This comment was made by PERA officials at a hearing before the JBC.) Note that Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.
Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes. My guess is that just a handful of members of the Colorado Legislature could tell you the difference between an automatic COLA and an ad hoc COLA.
The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations. I have a contract with my mortgage company. They don’t care if I want to spend my mortgage payment money on a new TV.
Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening, see saveperacola.com.)
Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):
Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
Senator Spence said “The bill places an unfair burden on retirees.”
Senator Scheffel said “We are breaching our promises to existing retirees.”
Senator Lundberg said “This bill is a deal that was cut before this body met.”
The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.
So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.
The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.
Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.
It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That is truly insane.
Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.
PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.” Why would Smith state that an action is illegal, and then decide to champion that action in the following year? Sounds quite fickle.
Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low. This is the clearest case of groupthink I have seen in my life. Don’t they get it? It doesn’t matter if five or ten percent of your retired members endorse your plan. It doesn’t matter that you drove all over the state to visit with your pension members. That is not the standard for constitutionality in the US.
Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts and actuaries. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow. They have 30 years.
There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year. Look Legislature . . . when the real pension reform happens in Colorado in a few years, please take the time to examine these prospective, legal reform options. You are members of the National Conference of State Legislatures, listen to their people, they will let you know what legal reforms are being made by states.
The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.) Where is this secret legal opinion?
Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of Senate Bill 1 refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.
PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.
While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations). (This half billion is documented in a brief by the JBC staff.)
The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.” During the debate on SB1, the Chairman of the House Finance Committee essentially stated that the retiree COLA had to be seized “because that’s where the money is.” Listen to the end of the tape of the House Finance hearing on the bill.
Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment.” This will be a long-standing embarrassment to and black mark on our state.