Tampa Bankruptcy Blog » Bailout

Bankruptcy not a Cure-all

dmishesq — Tue, 15 Feb 2011 18:02:25 +0000

Allowing states to file for bankruptcy is not going to cure all the public pension problems, according to one expert. Professor Joshua Rauh of Northwestern University told a congressional hearing this recently. However, Professor Rauh said the prospect of bankruptcy would likely give states more negotiating power in pension and labor contracts.

At present, states are not allowed to file for bankruptcy protection because they are considered sovereign entities.

But the estimated total pension liability of the states is $700 billion. Key Republican lawmakers in the House of Representatives recently introduced legislation that threatened states with a steep penalty for under-reporting pension liabilities – the elimination of federal tax exemptions for municipal bonds. There is an increasing support among Republicans in the House for bankruptcy to be allowed for the states. The rationale behind this is that bankruptcy would make it less likely for the state government to ask for a federal bailout.

A committee hearing was held on this matter not too long ago and representatives would not say when legislation allowing state bankruptcy would be introduced. The chairman of the sub-committee on bailouts, Patrick McHenry said he would continue holding hearings leading to a report on how to solve the states’ burgeoning pensions liabilities and budget problems.

Professor Rauh has cast doubts over whether state bankruptcy would avoid a federal bailout. He said, “…there is a bankruptcy code for corporations in the United States, and that has not stopped federal bailouts of corporations.”

Furthermore, last year he released a paper that shows the traditional 8% returns states expect on their pension funds investments has only a one-third chance of achieving that rate over 30 years. This was the rate of returns most state and local pension funds expect because of historically high returns but Professor Rauh reduced the expected returns and discovered that pension funds might fall short by as much as $3 trillion.

Investment returns of public pension funds have nosedived due to the sluggish economy as employers cut back on contributions in the face of dwindling revenue. The states have been putting the blame on pension payments for their budget problems.

According to Professor Rauh, “without significant tax increases,” state and local governments could not keep pension promises and take care of other debts.

If you are thinking of filing for bankruptcy for yourself or your business, call us at (813) 200 4133 for a free consultation.

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The Other Side of State Bankruptcies

dmishesq — Sat, 22 Jan 2011 18:24:41 +0000

Former House Speaker Newt Gingrich is all for having legislation that allows states to file for bankruptcy protection. Gingrich says that doing so would free state governments from their crippling debts and allow them to rebuild their finances. It would also cause state governments not to always approach the federal government for bailout funds. Although it seems a logical and simple solution to the financial problems of cash-strapped state governments, is there more than meets the eye?

Many do not realize that there are other options state governments have to reduce their deficits. For example, the state of Illinois just enacted a temporary state income tax increase to help close its budget gap. Likewise, California has initiated wage cuts and tax extensions in its struggle to overcome its $25 billion deficit.

Gingrich contends that the ability to file for bankruptcy would give state governments a greater bargaining power over labor unions who can be unreasonable with their demands. But whether or not a state is in bankruptcy, if it cannot pay its workers, everybody loses. Hence, labor unions would naturally have an incentive to compromise with state governments. In fact, some labor union bosses have already agreed to make concessions on benefits for new workers.

Another result of a bankruptcy filing for a state government would be an exit from capital markets. This would cut off a vital source of income for state governments and leave them having to search for other funding sources to finance infrastructure development and provide much needed revenue. For instance, California would need $10 billion annually to meet its cash flow needs.

In addition, legal bankruptcy overseen by the federal government goes against the constitution as each state is considered a sovereign entity. Such bankruptcy would also cost a huge amount of money for the states. Even when a city files for bankruptcy, it is an expensive affair, as can be seen in the case of Vallejo in California that filed for bankruptcy in 2008. It has spent about $9.5 million in legal fees thus far without an end in sight as the court case is still ongoing.

Lastly, if a state government is in bankruptcy, it would not be able to autonomously increase taxes. Hence, it would naturally mean that the state would have to rely on federal funding to see itself through the bankruptcy period, something declaring bankruptcy was meant to avoid in the first place.

Unlike the case with state governments, individual citizens have the right to seek bankruptcy protection and many have done so. If you wish to file for bankruptcy, call us at (813) 200-4133 for a free consultation.

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How Effective are State Bankruptcies?

dmishesq — Mon, 17 Jan 2011 16:12:07 +0000

At present it is not possible for states to file for bankruptcy protection as it is against the law. But this may change if a group of conservative lawmakers have their way in Washington. There is an initiative to get Congress to amend the law and permit states to file for bankruptcy. At present, about half of the municipalities in the states are allowed to do so.

Those who propose the idea say states with huge budget deficits like California would welcome it. These states are facing massive unfunded healthcare and employee benefit hence when they are allowed to file for bankruptcy, it would permit them to have all their deficits laid out and a systematic plan for recovery plotted out.

One strong advocate for state bankruptcy is Americans for Tax Reforms (ATR). The group lobbies for pensions and healthcare benefits to be curtailed upon bankruptcy of the state. But they are heavily opposed by the workers’ unions, for obvious reasons. Some unions see the ATR agenda as targeting the unions in their biggest representation, the government. Some 37% of government employees are members of unions whereas only slightly more than 7% of private sector workers are.

The American Federation of State, County and Municipal Employees are of the opinion that the ATR and groups like them are pushing for the right of states to file for bankruptcy as a means of reneging on their collective-bargaining agreements.

On the other hand, former House Speaker and potential Republican presidential candidate Newt Gingrich favors the right for states to file for bankruptcy because it is a means to get state governments not to go to the federal government for financial aid. Gingrich singled out California, Illinois and New York as three states most likely to ask for a bailout.

But as the debate rages on, investors are already scurrying away from financial markets. In November last year, the bond market experienced a rise in interest rates in long-term bonds and a rapid rise in new bond issuances by various states and municipalities. A second blow came when investors’ concern over deteriorating state and local government budgets and the talk that some borrowers could back down on their debts sent municipal bond prices tumbling recently. When Wall Street banking analyst Meredith Whitney went on national television to predict a rise in municipal bond defaults, the market got really frightened.

Against this backdrop, proponents of state bankruptcy are driving investors further away.

Are you considering the bankruptcy option for yourself or your business? Call us at (813) 200-4133 for a free discussion.

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Greece Ready to accept EU-IMF Plan

dmishesq — Thu, 29 Jul 2010 17:37:00 +0000

Two recent opinion polls showed that most Greeks agree that the country’s government has to adopt the austerity measures imposed by the European Union (EU) and International Monetary Fund (IMF) in exchange for bailout funds to avoid national bankruptcy.

The Greek government coffers have no money to meet its obligations largely due to endemic corruption, cumbersome bureaucracy and government largesse. The country is only one week away from defaulting on bonds worth €8.5 billion maturing May 19 for which it does not have the money to pay. Despite widespread violent protests last Wednesday, a majority of the people have begun to realize that they have to bite the bullet if their country is to survive.

In a poll conducted by the Proto Thema newspaper, 54.2% of respondents say they are willing to go along with the austerity measures imposed by the EU-IMF plan rather than see their country go bankrupt. On the other hand, 33.2% of those who responded to the poll feel the government should not accede to getting outside help but should rather go it alone. The poll also shows that 51.4% of the public are reasonable enough to accept that more personal sacrifices have to be made to overcome the economic crisis while only 28% believe that having strikes will solve the problem.

Another poll was conducted by the Sunday edition of the To Vima newspaper. This poll showed similar results in more than half of Greeks (55.2%) feeling that the EU-IMF austerity measures are necessary and they will ‘accept’ or ‘probably accept’ them. 44.6% of respondents in this poll do not accept the EU-IMF conditions. However in contrast to the other poll by Proto Thema, this poll discovered 53.2% of Greeks feel that strikes and protests should continue. However, 63.5% of these respondents do not think that the protests would stop the government from adopting the austerity measures.

In the Proto Thema poll, 1,000 people were asked if they thought the Greek workers unions keep their protests at a ‘rational’ level. A whopping 74% said yes while only 21% replied in the negative. This poll was conducted on behalf of the newspaper by Alco polling agency on May 5 to 7 through telephone calls after violence in Athens by protestors resulted in the deaths of 4 bank employees whose building was set on fire.

On what they thought of their political leaders, the poll showed that 49.4% of the people felt that Prime Minister George Papandreaou has been ‘responsible’ in his job while 39.9% said he was not. In a related result from the other poll by the To Vima newspaper, 71.3% of Greeks think the country’s major political parties should cooperate more to tackle the crisis.

The To Vima survey was conducted by the Kapa Research polling agency interviewing 1,030 respondents on May 6.

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Bailout Only Hope for Greece to Avoid Bankruptcy

dmishesq — Tue, 27 Jul 2010 17:55:40 +0000

In what seems like the only way out of a catch 22 situation, Greece has to borrow money from the International Monetary Fund (IMF) and its fellow EU countries to avoid national bankruptcy. The country is two weeks away from defaulting on €8.5 billion worth of bonds maturing May 19 for which it does not have the money to pay.

During a heated debate in parliament, Greek Prime Minister George Papandreou said the government has to avail itself to the €110 billion three-year package comprising of loans from other eurozone countries and the IMF. But the package comes at a price. The government must agree to severe austerity measures over the three year period. These measures include slashing salaries, pensions and increasing taxes. The government was trying to rush through legislation in parliament to authorize the austerity measures.

The loan package is also aimed at preventing the debt problem from spilling over to other European countries with vulnerable economies such as Portugal and Spain. Portugal and Spain has had their debt ratings downgraded which contributed to the depreciation of the value of the Euro from as high as $1.51 to below $1.28.

The austerity measures have sparked outrage among the Greeks, with approximately 100,000 people spilling into the streets last Wednesday, torching buildings, destroying public property, smashing windows and fighting with police. Three bank employees – a man and two women, one of whom was pregnant – died when they were trapped inside their building set ablaze by rioters. Another four people were rescued by fire fighters using a crane from the balcony of the bank. The deaths were the first protest-linked ones in more than 20 years and have shocked the nation in which protests are common but rarely result in fatalities. A makeshift shrine with flowers and candles was set up in a charred window of the Marfin Bank, the scene of the deaths.

41 policemen and 15 civilians were injured in the riots, while 25 people were arrested. When the journalist union canceled their participation in the protests, newspapers were rushed through the press on Wednesday just in time to report on the riots and deaths. But despite the fatalities and general carnage, unions and far left groups were planning for more protests on Thursday.

The bank workers’ union called for a strike Thursday to protest the deaths of their members and at the same time laid the blame for the violence on the government’s austerity measures. However, most banks in central Athens remained open.

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Bailout Only Hope for Greece to Avoid Bankruptcy

dmishesq — Mon, 24 May 2010 16:25:50 +0000

Greece Ready to accept EU-IMF Plan

dmishesq — Sat, 22 May 2010 16:14:39 +0000

The To Vima survey was conducted by the Kapa Research polling agency interviewing 1,030 respondents on May 6.