States BK


Another round of IOU's?

Inquiring minds are reading The Economist’s “State of Default” and wondering just when California will formally enter into this scenario.

The panel was assumed to be a bunch of Presidential advisers faced with a request for funding from New Jefferson, a fictional state with many of the problems of a typical state – unfunded pension promises, years of fiddling the numbers to balance the budget and a government divided between the parties. New Jefferson is shut out from the markets and asks the Federal government for $1.5 billion to meet a debt repayment due 48 hours away. There could be systemic risks if default occurs with the Chinese government raising the issue of contagion and with some state banks owning a substantial portion of the state’s bonds.

The panel reluctantly agreed to provide temporary funding for the state – say for 30 days – but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.

It is interesting to note that even this blue-ribbon panel couldn’t quite figure out what to do. Especially considering that the money needed by the state is less that California will most likely ask for:

The panel reluctantly agreed to provide temporary funding for the state – say for 30 days – but to require the state to sort out its mess. But it suggested a whole series of stringent conditions, including the use of proper accounting and a requirement to fund its pension plans properly. they were divided over what would happened if New Jefferson failed to save its problem within 30 days.

One suggestion for the long-term was that failed states might see their finances taken over, as happened to Washington DC, with the Federal government taking the decisions. The tricky issue is whether they legally could take such a power.

The panel didn’t have time (or, it sounds, enough of a consensus) to tackle the problem of long-term pension benefits and if they can be tackled if the courts decided that existing pension rights are legally protected. If they are legally protected, then the only answer would be substantial tax rises to pay for them. (Listening California?) And, of course, California IS the home of the 9th Circuit!

Maybe California is about to reap what it has sown for years.

Please read the rest of the article.

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One Response

  1. Bob,

    I think you got a great idea with your website. As Californians wake up, they will be coming to your site in droves to find out what is happening.

    I think I am going to Blockbuster and check out Marry Poppins to go cheer myself up!

    Your bud,
    Dan

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