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The unspoken Chapter
Talk all you want about Chapter 7 bankruptcy. Discuss the possibility of Chapter 13. Hold a meeting to debate the merits of Chapter 11. But whatever you do, dare not speak about Chapter 9.
Chapter 9 is the place cities and counties go to seek shelter from creditors while they get their financial house in order. It's rarely used. It's last resort. It's taboo. But, says the Wall Street Journal, the economic slump...
...is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk.
Just speaking of Chapter 9 invites questions from rating agencies, according to a recent report from Fitch:
"The more bankruptcy is publicly discussed as an option for financial relief, the more its tarnish wears off, increasing the likelihood of its actual use," Fitch said.
The Journal highlights Pennsylvania's capital city of Harrisburg. Harrisburg is speaking of Chapter 9:
..."Bankruptcy is inevitable," Mr. Miller says. "We are in a terrible bind." A budget passed Saturday by Harrisburg's city council didn't include any funds to cover (its) debt payments, according to the city clerk's office.
Harrisburg Mayor Linda Thompson, a Democrat elected in November, opposes a bankruptcy filing and has presented an emergency plan that includes selling some of the city's assets.
Harrisburg's controller says the city can't have a fire sale of assets like parking decks because they generate revenue. He says the city can't raise taxes: "They're already very high. If we did, people would just leave. It's cheaper to move out to the suburbs."
So it could be Chapter 9 for Harrisburg. Some states don't even allow their municipalities to file Chapter 9. Pennsylvania does but tries to avoid it at all costs. A few years ago, the state took over the finances of Pittsburgh instead of considering Chapter 9. The state still oversees the Pittsburgh's budget.
But states have their own budget nightmares. There seems to be little end in sight to this mess.
...many experts fear that a surge in municipal bankruptcy filings is unavoidable. "The day of reckoning is coming," says Michael Pagano, dean of the University of Illinois at Chicago's College of Urban Planning and Public Affairs.
The article really only tells about half the story. The more interesting half of the story is what happens to municipal bonds when an entity declares bankruptcy.
In many states, constitutional provisions require bondholders to be paid first -- even ahead of public servants and trade creditors such as road crews. I may be wrong, but I recall that even in the Orange County bankruptcy, all the bondholders were repaid.
So, municipal bonds are -- on balance -- still very safe investments.
Of course "the day of reckoning is coming". Why not? I say bring it on. We've already bailed out the important people in the world, everyone else....it's time for reckoning. Cities and towns across the country, Get Ready! All you serfs out there, Get Ready!
Perhaps the 2010s will be the decade of paying the piper? The part that sticks in my craw is that the baby boomers put the USA into this bind, tighten the noose with a couple of under funded wars, and let it all tip into panic mode just in time for them to retire. I feel like kicking any politician that considers the entitlement programs as being an untouchable third rail. Raise the retirement age. Let the boomers earn and pay taxes for a few more years. Raise taxes for those same few years. Let the boomers start paying off the debts they have piled up.
