WASHINGTON — At least two House panels plan to hold hearings on states’ fiscal problems and potential solutions, including whether states should be allowed to file for bankruptcy protection.
The House Judiciary Committee, chaired by Rep. Lamar Smith, R-Texas, will hold a hearing in two weeks to explore some of the concerns about states declaring bankruptcy, according to a spokeswoman.
“While bankruptcy for states may seem like an attractive alternative to state bailouts,” she said, “there are significant constitutional concerns that should be addressed by congressional hearings. There are also policy concerns, including whether state bankruptcy will actually encourage more irresponsible spending by states.”
A House Committee on Oversight and Government Reform panel, chaired by Rep. Patrick McHenry, R-N.C., plans to hold a series of broader hearings beginning as early as next month. They will focus on states’ short-term fiscal problems, such as loss of revenue and budget gaps, as well as such long-term problems as unfunded pension liabilities and whether their disclosure is adequate, as well as possible solutions.
“It will be heading off potential state bailouts and just understanding better the fiscal shape the states are in … the implication it has on the bond markets, and whether or not, under current law, they have sufficient capacity to fix the problems that they’re facing,” McHenry said.
He chairs the subcommittee on the Troubled Asset Relief Program, financial services, and bailouts of public and private programs. The top Democrat on the subcommittee is Rep. Mike Quigley from Illinois, a state whose pension disclosures have been under review by the Securities and Exchange Commission.
The full committee chair is Rep. Darrell Issa, R-Calif., who is expected to reintroduce a bill, along with Reps. Paul Ryan, R-Wis., and Devin Nunes, R-Calif., early next month that would prohibit states and localities from issuing new tax-exempt debt or receiving federal subsidies on taxable debt if they don’t file annual reports on their pension plans with the Treasury Department. The bill, which was previously issued in December, will aim to increase transparency by requiring the reports to include estimates of unfunded liabilities based on a highly conservative set of benchmarks.
McHenry said the panel may ask SEC officials to testify at the hearings and that he also wants to hear from analysts, credit rating agencies, state and local officials, and retirees. “I believe the American people, and especially those receiving state pension [payments], have a right to know the fiscal shape of their states,” he said. “There’s concern right now that there’s not adequate disclosure of state and municipal liabilities.”
McHenry stressed he has no opinions on these issues right now and that these are not Republican versus Democrat issues. “My office is reaching out to folks but we’d like to hear from folks, too,” he said. “We want market participants to come forward with ideas.”
Meanwhile, while former Florida Gov. Jeb Bush and former House Speaker Newt Gingrich laid out their case for states to be allowed to file for bankruptcy in a Los Angeles Times op-ed piece Thursday, Standard & Poor’s warned that any such filing would cause it to reevaluate a state’s creditworthiness.
Standard & Poor’s said Wednesday that its rating criteria, under which most states are able to obtain at least a AA rating due to their strong repayment histories, even in times of stress, relies on states’ not being eligible for bankruptcy.
“If a state were to file for bankruptcy protection, or we were to become aware of a state considering such a filing, we would likely reevaluate our creditworthiness opinion and take ratings actions that we deem appropriate in accordance with the 'overriding factors’ of our state rating methodology,” the rating agency said.
But Bush and Gingrich argued bankruptcy should be a voluntary option for states near default because it would allow them to “reorganize their finances free from their union contractual obligations” and restructure their debt and other obligations.
“When California refused to bail out Orange County, the county entered bankruptcy and emerged within 18 months,” the two Republicans said. “Within three years, the county returned to an investment- grade rating, and it repaid 100% of the principal of the vast majority of its investors by 2000 without raising taxes.”
Any new law should give federal judges the power to accept or reject state bankruptcy plans, Bush and Gingrich said. “Just as with municipal bankruptcy, this new law for states must explicitly forbid any federal judge from mandating a tax hike or carrying out any other government function,” they said.
The new law also should provide for triggering mechanisms, they said. In California, for example, voters should be allowed to decide if they support reorganizing their state government under the U.S. Bankruptcy Code.
“An additional benefit of a new voluntary bankruptcy law for states is that its mere existence may deter any state from ever availing itself of its provisions,” they said in the op-ed piece. “If government employee union bosses know that they could have all their contracts annulled under federal bankruptcy law, either through a plan of reorganization voluntarily entered into by state leaders or by the voters through proposition, they may be far more accommodating with state governments to restructure government employee union work forces, pensions and work rules,” they said.
But Jim Spiotto, a bankruptcy expert at Chapman and Cutler in Chicago, said there are other ways to deal with worrisome state fiscal issues like growing state unfunded pension liabilities besides bankruptcy.
Spiotto, who recently met with congressional staff, suggests the creation of a federal quasi-judiciary Public Pension Funding Authority, or individual authorities, that would consist of independent pension experts who could determine if state pension plans were sustainable and affordable. If a state did not have a sustainable pension plan, the authority could recommend adjustments to the plan to make it sustainable.
“It could be created by a state, or by the federal government as something the states could opt into,” he said in brief interview.
Chapman and Cutler is currently surveying each of the 50 states to determine what they already have on their books as to the rights and remedies bondholders should severe financial problems arise. Spiotto said it should be completed in a month or two.
Andrew Ackerman contributed to this story.
