TARP 2.0: States Declare Bankruptcy

Illinois goes first, hands down. They are already discussing the idea in Washington and, after doing things like selling their parking meter revenue for the next 75 year, they pretty much deserve whatever they get.

Midas, I'm putting my money on the Garden State!

I'm taking odds here... 10:1 that NJ's first. California gets 7:2 odds. Illinois is 12:1. Michigan is 15:1 DC Failing is 350:1 odds becuase you know there is no way that Washington would let their city fail.

Any other state's I'm missing?

I live in Chicago and they just raised the state income tax here to 5%, complete BS.

@Happy

Illinois is the popular pick, but you're forgetting that Obama would be fully exposed if that were to occur. The Demoncrats would sooner push California fully into the Pacific than allow that to happen.

@ Frieds

New York's underrated in the "potential to fail" department. Wouldn't quite put them in the "Calinois" range, but I don't think 25:1 by your implied metrics is too big of a stretch. I really like Michigan as the sleeper pick here, bracket buster all the way. Definitely Rutgers in the NIT.

@HFFB

To add to the highest sales/corporate real estate taxes in the country and a hereditary monarchy in the mayors office. Take a ride down the Red Line to 95th and enjoy what your days at the office pay for year in/year out.

v

I'd take Illinois at 12:1 for sure, but I agree NY and Mich could be worth betting given those odds.

MMM- You definitely don't even have to go all the way to 95th, just go a stop or two south of US Cellular and you'll be in odd company.

I used to take a bus that ran from downtown to the south look, but continued through the souh side. The mornings were great, but the afternoon was always awful. It would never fail that at the Target on Clark and Roosevelt a teenage mom would get on with 4 screaming kids under 5. She'd then often put her headphones on and let her kids run and scream through the bus.

I wonder what race they were.....

Haha i love how my racist comment gets a SB. Gotta love WSO.

Sovereign states without a currency. And you guys were mocking Europe! Who's laughing now?

I guess it's hard to be not politically charged on this topic....but the language and the rhetoric....I was expecting better from wallstreet oasis monkies.

Anyone else find this somewhat poetic that this is the same state Obama was a senator in just a few years ago?

IL is making some of the right moves to turn this around. At least they are raising taxes. Perhaps they will start cutting spending with the now more Republican legislature.

Election year is fast approaching; protecting Obama will be the top priority. My money is on Cali.

Thoughts on TARP 2.0 being “forced” on all of them…..perhaps California, Illinois, and Jersey going down together?

I hate to be fatalistic here, but the moment TARP 2.0 gets thrown onto the State of NJ, it's GAME OVER MAN! GAME OVER! I'm just afraid Tarp 2.0 will be a carte blanche for the Unions to do what they want and pile it onto the taxpayers, without any real proof it works to fix the problem.

Frieds, I only disagree because of that huge Mob Bust yesterday....otherwise, I would be less confident.

I am almost tempted to make this a new post, but for now it will remain here.

I was tempted to post the original article last night when I saw it. Looks like 3M beat me to it. At any rate, I did a little searching and found a rebuttal to it:

http://www.cbpp.org/cms/index.cfm?fa=view&id=3372

Executive summary:

Bond servicing to income represents roughly 5% of local budgets. Debt is not used to finance operating activities. The rare exceptions are Louisiana and Connecticut. Most sources (including Barclays) vouch for an extremely low probability of local muni default. The histoircal muni default rate is 0.33%. Most defaults result from failed projects (hospitals, etc).

Pension obligations are largely the result of using the risk free rate as the discount rate. If historical returns of funds were used instead, the amount underfunded would fall to 750 billion from 3 trillion. As an aside, this thought has been running through my head for awhile. Time to pull out Kieso/Weygandt and review Monkeys.

Local governments (and states) are not required to guarantee health plans and the author hints it may be in the state's best interest to cut or axe those programs.

Some states do have structural issues - the growth of expenses faster than revenue, most typically in the form of medical care for citizens. But structural issues are lumped together with the aforementioned issues and turned into political talking points, convoluting the actual issue.

Bottom line: Debt to GDP for municipalities, while high, is in line with other economic downturns Percentage of budget to debt service is actually at a historic low. Pension accounting should be modified to reflect actual returns. States should make clear pensions are no longer riskless. Health care expenses need to be renegotiated, cut, or heavily modified.

Illinois is a crack junkie and we just raised their allowance

California will be Greece in 5+ years...

The Mob and the Unions are two different things. The Unions are legal and ran by the mob... the Mob itself is not.

And great link New Mountain, but having read the 21 page report, I have to wonder what these people are smoking. It's too Keynesian for me... And it's utterly worthless. Please explain to me how issuing new debt will help get us out of this crisis only to add to future liabilities and taxpayer burden.

In sum, there is no bubble in state and local bonds. States and localities in aggregate have not overextended themselves with respect to their debt-financed capital spending. Indeed, many analysts decry the deteriorating state of infrastructure in this country and its negative effect on economic development.24 For this reason, and to shore up the economy in the short run, the manageable uptick in outstanding state and local capital debt is entirely appropriate.

Really? If what they say is right, then why aren't my tax dollars going to rectify the problems in my town? Why aren't my tax dollars, in the form of property taxes, going to work in my town? Why do we need to issue new debt to fund expenses in the towns we live in? Why should we do this when our town sees less money than it should since it all goes to fund a shithole like Newark or Camden, or the failed educational savior called the Abbot School Districts? Ivory tower idiots... the lot of them.

And as to what you said about the bottom line for pension accounting... this just stood out like a sore thumb:

While economists generally support use of a riskless rate in valuing state and local pension liabilities, they do not generally argue that the investment practices of state and local pension funds should change. State and local pension funds historically have invested in a market basket of private securities and have received rates of return much higher than the riskless rate. As Figure 4 shows, the 8 percent discount rate that most funds now use reflects actual returns over the past 20 years.

The only nugget of truth... and I emphasized what I thought was important as well... No one cares how risky the pension funds get when it comes to investments as long as it helps keep the 20 year average return rate of 8%. That's sheer brilliance.

After reading that, I'm changing the odds on California... it's no longer a 7:2 call... it's 11:4 odds.

A prepackaged bankruptcy, GM-style is probably the best we could hope for. GM was probably the only bailout of the past two years that wasn't completely awful.

"In the past, investing in municipal bonds has been considered second in safety only to that of US Treasury securities; however, there has now developed among investors ongoing concerns about the credit risks of municipal bonds. This is true regardless of whether or not the bonds are given investment-grade credit ratings by the commercial rating companies. There are several reasons for this: (1) the financial crisis of several major municipal issuers beginning with the City of New York billion-dollar financial crisis in 1975; (2) the federal bankruptcy law (which became effective October 1979) that makes it easier for municipal bond issuers to seek protection from bondholders by filing for bankruptcy; (3) the proliferation of innovative financing techniques and legally untested security structures, highlighted by the default of the Washington Public Power Supply System in the early 1980s; (4) the cutbacks in federal grant and aid programs that will affect the ability of certain municipal issuers to meet their obligations; and (5) fundamental changes in the American economy that may cause economic hardship for municipal issuers in some regions of the country and thus difficulty in meeting their obligations."

This is from The Handbook of Fixed Income Securities, 4th edition, 1995. Funny, but this sounds like a current newspaper article.

NewMountain, no... We don't agree. The reason why we're in this problem is that revenue doesn't mean expenditures. It's called deficit spending. The last time NJ raised taxes to cover their budget deficit, they raise the sales tax by a point going from 6% to 7%. You know what the end result of that was? It created 75 cents on the dollar worth of Pork Spending for every 25 cents directed towards the budget gap. Explain that one to me? Tell me how New Jersey had a 10 Billion Dollar Budget Deficit going into last year's budget if our revenues met our OpEx? Fucking 'eh, what about that ARK Tunnel to Macy's and an easy 5 Billion in added liabilities that NJ would be responsible for that wouldn't be figured into the budget until they occur and create another deficit. And scale back? It's called a contract and any fight versus a contract is hard when you go against the unions is a union happy state. I didn't touch Health Care because there are way to many problems with that bag of worms that if I got onto the topic. And Pension Estimates, yeah... explain to the Unions why 8% yearly Rate of Return is unfounded and see what they say. Again, this report is a bunch of ivory tower academics thinking they understand the world when it's not as black and white as they portray it.

Goodbread, it won't work. the problem with considering a prepackaged bankruptcy is who curries the most favor wins the battle at the end of the day. Either way the taxpayers are fucked, but's a question of who'se got the most to lose.

NewMountain, you just made my day with that.

Why can't states just tell employees its time to scale back? The expenses of bankruptcy seem extreme compared to their possible benefits. The reason I have heard is that politicians can bargain more effectively under bankruptcy conditions, but it seems ridiculous to drive up borrowing costs to save face.

Clearly you don't know how the unions and the public sector work. Once they have something, they won't give it up without a fight. They don't scale back. They don't give in. They are always right. That's how the Union operates. They give ground and in their mind, they can't get it back. Look at the Police issue in Camden. That should be enough said about "Scaling Back". You don't seem to understand that you're not dealing with the private sector any more. It's a whole new ball game.

Doesn't this highlight the problem with non-compulsory voting? It allows organised minority groups (e.g. unions) to wield greater political power. I'm interested if this is a factor or not in US politics (I don't live in the US).

Compulsory voting would not go over well at all but you do make a good point

Yea. Open border is not the answer. And I'm changing my vote to California

No state will default. Used to be a muni credit analyst for a few yrs. States have too much flexibility to lush fiscal woes down onto the local governments. Made a few points in another thread about this- No state will file ch 9.

AG, you've already heard my thought. I gotta disagree and I see it as something coming down the pipe, especially after cities like Newark and Camden fall. You drop the big cities and the rest will crumble with them.

-

The fact that you can't form a coherent sentence makes me feel a lot better about my argument.

Clearly in a time of national security concerns there are no obvious downsides to an open border

Not if you're a true altruist.

If you are a believer in free markets, then surely you have a problem with rent-controlled apartments and taxi medallions. How different is that from closed borders? A lucky few are entitled, and society gets nothing.