By Alix Ohrt

According to an article put out by Reuters on Tuesday, February 01, 2011 the Municipal Securities Rulemaking Board has started talks about greater disclosure requirements for the municipal bond market. The billions of dollars in unfunded liabilities owed to public employees’ pensions is one of the largest current problems that financially troubled states are currently facing.
            The Municipal Securities Rulemaking Board (MSRB) is responsible for writing the rules for the $2.8 trillion municipal bond market. Chairman Michael Bartolotta told reporters in a conference call on Monday that they are in early discussions on expanding disclosure requirements for the municipal bond market.     
            The board’s executive director Lynnette Kelly Hotchkiss said the boards concern is to consider what information an investor might need to fully understand the risks some bonds pose, in order to increase transparency. She also went on to say that, “The securities laws require disclosure of all material facts, if there is a pension liability that could impact the budget or the finances or the quality (of a state or local government) that is a material fact that needs to be disclosed.”

Last year, New Jersey came under fire from the Securities and Exchange Commission – who enforces the rules the MSRB writes – for not properly disclosing its pension liabilities to bond buyers. A similar argument has recently been waged against Illinois.

Chairman Bartolotta said the board could ultimately require public pension information to be disclosed on a website known as the Electronic Municipal Market Access, better known as EMMA. However, the board first needs to determine which information must be disclosed.

Newt Gingrich has said that legislation will be introduced that will essentially allow states to file bankruptcy. For months Gingrich has championed letting states file for bankruptcy in order to handle their long-term budget problems, but is facing heavy resistance from states and investors in the $2.8 trillion municipal bond market. Also, on February 9th, many house members opposed the idea of federal bailouts for governments, as well as any sort of bankruptcy protection. Several House and Senate Republicans reintroduced legislation that would increase disclosure obligations for the public-sector pension systems.  This legislation has gained substantially more support, and is expected to soon be brought forth at hearings and moved through Congress.

Because states are sovereign, they cannot declare bankruptcy as cities can, and most have provisions in their constitutions that make defaulting on debt next to impossible. The New York State Comptroller, Thomas P. DiNapoli said that “Just the availability of a bankruptcy option and the potential bond default could severely damage state credit ratings and destroy the trust of bondholders.”

Just a few weeks ago, the municipal bond market suffered a sharp sell-off on fears of defaults by cities and other issuers.

Filing for bankruptcy would allow states to renegotiate their pension liabilities and other obligations to state employees under labor contracts. State bankruptcy may be a way to put additional pressure on public employee service unions to negotiate, said Howard Cure the director of municipal research at Evercore Wealth Management in New York.

Is bankruptcy the right option? In bankruptcy court a judge could force lenders to accept less than what they are owed, and more importantly – expensive union contracts could be replaced with cheaper ones. Bankruptcy – in theory – could afford states the opportunity to regain financial stability in a short amount of time. There are many draw backs to the state bankruptcy option; states can end up being tied up in court and in the end only end up marginally better off than in the beginning. According to the Investment Company Institute, investors pulled a record $21 billion from municipal bonds in November and December. This was twice as much as investors took out during the middle of the 2008 financial crisis. The fear of bankruptcy has already had negative effects on small cities and towns that are afraid to issue new debt in fear of the bankruptcy option.

Intern Alix Ohrt, is a senior in Economics at St. Cloud State University