The chatterati have been babbling on about Mitch McConnell's remark last month concerning letting states declare bankruptcy. Let's put this horse down right now. Federal law does not permit states to declare bankruptcy, and it would involve an amendment to the Federal Bankruptcy Code to even permit this to happen. Researchers would be advised to look to the state of Arkansas from 1933 for an example of how this might play out for states that were permitted to do so. It isn't pretty. States can be insolvent, but they can't go bankrupt. In the former case, they are declaring an inability to pay their current bills, but it doesn't involve an unelected Federal Judge from elsewhere to prescribe solutions for creditors. Puerto Rico in 2014 provides an instructive example there.
There is always Municipal Bankruptcy. Well, yes if it is permitted by State law. Oregon doesn't permit municipal bankruptcy without amending the Oregon Constitution. And if that happens, one can look to Orange County, CA for an example of how that worked out.
In short, the odds of Oregon (1) declaring bankruptcy or (2) Oregon allowing municipal bankruptcy are virtually nil.
Thus, this is a solution that isn't on the table now or anytime in the near or distant future. With this said, I still expect some legislators, likely from the same party as Mitch McConnell, to try to force PERS retirees to accept some cuts to their current benefits. Whether the current Supreme Court would permit this remains an open question. The Moro ruling (2015) seems to preclude this possibility, but circumstances change, and the current situation is unprecedented in my lifetime. People who ask me to forecast the future are grasping at straws. My magic 8 ball says, "ask another time with more information".
15 comments:
Hi, Marc: Given the revenue forecast yesterday, some federal support would be great and of course it has nothing to do with bailing out blue states. McConnell's home state, by the way, comes up second in raking in more federal support than its residents pay in taxes: https://www.usatoday.com/story/money/economy/2019/03/20/how-much-federal-funding-each-state-receives-government/39202299/. Move on ... nothing to see here folks...
It will not come to bankruptcy. The question instead I think is trickier: What are the conditions under which a state can declare "financial exigency" or the equivalent, and abrogate obligations of various descriptions? I wonder if you or anyone reading this has an idea.
Oregon has tried the “financial exigency” ploy twice before - once in Strunk and the second time in Moro. The Supreme Court was unsympathetic in both cases, arguing that the state and the local jurisdictions had not shown any evidence to support their claims, and besides, they all retained taxing and bonding authority. Given that history, I’m not persuaded that it will work all that much differently this time. I recognize that the circumstances are completely different this time around, and there may be more sympathy and better evidence, but we are a long way from that conclusion. PERS is in a unique position; in discussions of the topic of municipal bankruptcy in the 2001 legislative sessions, the presenter (whose name is lost to the ages) pointed out that IF municipalities were permitted to declare bankruptcy, PERS recipients, by law, would be the first creditors to have to be paid and only after they were paid would other creditors get in line.
I’m not arguing that a declaration of financial exigency won’t fly; only that it has been presented in two major PERS case recently, and the court might view this as the case of “the kittle state that cried wolf” too many times.
Heads up, unretired members! Re: IAP accounts, I spoke with PERS recently about why my IAP account had not been rolled over yet after my May 1 retirement. I discovered that my age-targeted IAP account is down 1.17%. I was told that other IAP age brackets fared worse, with declining interest rates every month in 2020 so far. I thought that the retirement age target fund was protected from losses, but that was incorrect. I have retired, but IAP accounts can take 120 days or so to process, as they are not subject to the law stipulating a 90-day turnaround like the old PERS fund. Surprisingly, I received my first retirement benefit deposit June 1, only one month after turning in my retirement papers at the PERS office. The PERS rep said this was unusually quick. Perhaps there weren't many retirements in May?
--LK
I retired on April 1st and had my first check deposited on May 1st, so yes, they are processing them quickly. My rollover took about a month and a half...I got it mid May. And yes...it took a bit of a hit.
Given the bounceback in the stock market, there's no reason for current retirees to be concerned about giving anything back. Even after the market's disastrous performance in March, the OIC was only off about 7%, so it wasn't even much of a consideration then. At some point, there WILL be legislation that compensates states for much of the losses incurred because of the costs they sustained in dealing with COVID-19 and the reductions in revenues from business closures.
@mpguy. While you and I, as well as PERS, have ridden through the valley, we (and PERS) are barely back to where we were on March 1, 2020. I would not be too glib about continuing to enjoy this current rate of growth through the rest of the year. We still have a national election coming up, and if the Ds hold the House, and either win the Whitehouse, or take control of the Senate, I expect the market to fall hard, in just the same way it will fall if there is a resurgence of Covid and lockdowns begin again. The only way the market will rise in November is if the R’s hold the Senate and Trump is reelected. The Ds, whom I support, arenot typically good forbusiness, especially coming off years of Trump munificence towards business and the wealthy. If things look like a D landslide in late October, I will personally instruct our Portfolio manager to take some defensive strategies to derisk our personal portfolios.
Marc, I think you are too readily buying in to the all-too-common fiction that Republicans are better for the stock market than Democrats. Consider how well the market did under Obama:
https://www.forbes.com/sites/chuckjones/2020/02/29/four-charts-comparing-trumps-vs-obamas-stock-market-returns/#48eb06f43552
And over a longer historical record, investors have done better under Democratic administrations than Republican ones:
https://www.ft.com/content/38829e98-5180-11ea-a1ef-da1721a0541e
@Andrew. You have badly misjudged my political sentiments and my beliefs. The stock market will go whichever way it thinks will be good for business, and for the affluent. Right now, that sentiment still resides with the Rs, but the Rs continue to shoot themselves in the foot by pointing the gun at their head. By November, who knows what will happen? But, that said, the stock market is fickle, unpredictible, and to some extent, random. Regardless of how the 2020 elections turn out, I’ve already contacted our portfolio manager to call in the last week of October. Whatever happens on November 3rd, it will be chaotic and the stock market does not like chaos.
Marc, I wrote with the understanding that your political sentiments favor Democrats (as you've explicitly stated that). As far as what I took to be your views about the market, I was simply responding to your statement that "I expect the market to fall hard" if the "Ds hold the House and either win the Whitehouse, or take control of the Senate," and that "the only way the market will rise in November is if the R's hold the Senate and Trump is reelected." That at least sounds a lot like saying you think the Rs would be better for the market than the Ds. But I appreciate the clarification, and am happy if I did misinterpret what you meant. From my own perspective, Dems like Biden tend to be very Wall Street friendly, and I don't see his election having much negative impact on markets. If anything, the fact that Trump is increasingly inciting chaos and would likely continue to do so even more in a second term suggests to me that the election of Biden would offer a sense of calm and stability that would be good for the markets.
I share the concerns regarding the chance of benefits being reduced for those already retired, and am consequently considering a double lump sum retirement. Does anyone have a recommendation for an independent (fee based) financial advisor, who is also well versed in the PERS program?
@POP. I suggest you post your question on the Google PERS discussion group (POD). You can find a link to the group on the home page of this blog, under Links.
Any updates on the situation with PERS and if people who are close to retiring should retire by the end of November 2020? Also, how do I join the POD group on Google?
Thanks!
The link on my blog will take you to the POD page. You can join there.
Kate just announced a special session for August to "rebalance the budget. " do we have anything to worry about?
I haven’t discovered anything yet, but I wouldn’t draw any conclusions.
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