Reference Materials - Federal Bailouts of Illinois and Detroit, Etc., Etc., Etc. – May 8th

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The focus of our next meeting (May 8th) will be the “Looming Federal Bailouts of Illinois and Detroit, Etc., Etc., Etc.” caused primarily by under-funding of state and local pension plans that the non-partisan Congressional Budget Office estimated in 2011 probably amounts to $4 TRillion.

Recent events include the spectacle of the bankruptcy filing of Stockton CA being supported by Calpers (the California state-employee pension fund) but opposed by bondholders because Stockton proposes to short-change bondholders disproportionately in order to protect Calpers.

While the bankruptcy filing of San Bernardino CA is opposed by Calpers and supported by bondholders because San Bernardino proposes to treat all creditors equally.

And Detroit MI was even denied the privilege of filing for bankruptcy by the Governor of Michigan who announced a state takeover two months ago (local governments are chartered by each state which can modify or revoke the charter at any time). Yesterday (4/12/2013) the Mayor of Detroit who no longer has any power, proposed a budget with a $380 million deficit, and the Dictator of Detroit appointed by the Governor, issued a press release rebuking the Mayor and reminding him that he has no authority.

We will also study why municipalities get a “free pass” under the Bankruptcy Law. After all, if homeowners in a geographical area formed a partnership to provide themselves with police and fire protection, schools for their children, etc., all of the homeowners would be personally liable for the debts of the partnership, including unfunded pension liabilities.

If the homeowners had used a real partnership instead of calling their partnership a “municipal government,” creditors such as their employees suing for their pensions, would be able to obtain in Federal Bankruptcy Court such remedies as attaching the salaries of all the residents, and liquidating their assets (INCLUDING THE FORECLOSURE OF THEIR HOMES subject to any so-called Homestead Exemptions) to pay the pensions.

This could, of course, turn the geographical area into a proverbial Ghost Town. Which Detroit and many other urban centers, already are.

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Even if the pols wanted the federal government to bail out all the profligate state and local governments, would the federal government have the financial capacity for doing so???

And what if, for example, the federal government could only bail out the pensions for the employees of the profligate (primarily Blue) states and their local governments, by eliminating Social Security for the general population???

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There do not appear to be any books on this topic, so this is another occasion for which we will have to do our own homework.

The initial reference materials posted in this section include --

(1) The 2011 analysis of the non-partisan Congressional Budget Office explaining why the under-funding of state and local pension plans is calculated to approximate $4 TRillion.

(2) The Wikipedia overview on municipal bankruptcies.

(3) The statutory text of Chapter 9 of the Federal Bankruptcy Law which governs municipal bankruptcies.

(4) The 1/28/2013 Reuters article about Detroit’s looming bankruptcy.

(5) The 4/12/2013 Reuters article describing the War of the Budget between Detroit’s Mayor and Detroit’s State-Appointed Dictator.

(6) The 4/3/2013 Reuters article describing the War Between Calpers and The Bondholders of Stockton CA and San Bernardino CA.
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