Can an Entire State Declare Bankruptcy?

Is bankruptcy the answer to budget and public pension woes of Michigan and other troubled states? It might not be as far-fetched as it sounds. Policymakers are working behind the scenes to make it possible.

Mary Williams Walsh of The New York Times reports:

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.

For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possibility in a hearing this month.

Flint and Public Pensions

A reader has a question related to the pension issues facing Flint and other cities and states across the country. Anyone able to fill us in on the details?

It’s a shame that incomes and property values have fallen so much that we can’t meet our promises to retirees. Add the demographic shift, and the situation stinks!

On a local level, Flint City Council recently rolled the defined contribution plan into the defined benefit plan. The argument from Council was this action would save the General Fund $4m this year because the defined benefit plan was dangerously underfunded. All this was on the third add-on resolution, i.e. a resolution not on the official agenda, at the 11/8/2010 meeting.

What I don’t know is whether the city simply pooled the money together in an accounting arrangement or whether the city functionally eliminated the defined contribution plan. Does anyone know more of the details?