Some time ago, I mentioned that P2P lending investors should no longer believe that a peer to peer lending loan to federal or state government employee is a “sure thing” or that government employees can never be laid off.
Since then, lots of supporting evidence has manifested. Not only from state governments eying bankruptcy court as an easy fix for their budget woes, but federal legislators are currently drafting new laws that would allow states to file for bankruptcy protection, settle existing debts for pennies on the dollar, reduce pension incomes for retired government officials/workers.
The city of Vallejo, California, proposed paying some creditors as little as 5 percent of what they are owed, making it the first general municipality that would fail to fully repay its debts in bankruptcy.
General unsecured creditors would collect 5 percent to 20 percent of their claims under the plan of adjustment filed late yesterday in U.S. Bankruptcy Court in Sacramento, the state capital.
No city or county has used federal bankruptcy laws to force creditors to take less than they are owed, according to Bruce Bennett, the lead lawyer for Orange County, California, when it filed the biggest municipal bankruptcy in the U.S. in 1994.
Vallejo’s plan assumes the city can’t provide essential services, like police and fire protection, while also paying its debts, he said. Should the city succeed, the case “may become an important precedent,” Bennett said in an interview.
The creditors, who include retirees and former employees, would be paid $6 million over two years. The plan must first be voted on by creditors before U.S. Bankruptcy Judge Michael S. McManus decides whether to approve the proposal.
“While the city regrets that it cannot pay a higher percentage, the fact is that the city lacks the revenues to do so while maintaining an adequate level of municipal services such as the provision of fire and police protection and the repairing of the city’s streets,” Vallejo said in the filing.
About 335 workers, representing one-sixth of the local government work force, lost their jobs, according to Mayor Dana Redd. It was worst in the public safety departments, where nearly half the police force and close to one-third of the city’s firefighters were laid off.
“My bill really sends a warning shot across the bows of the states to get their fiscal houses in order,” he said. “It’s intended to wake up the states, wake up the public, to let them know they can’t just run to the federal government to bail them out.”
Gingrich said in a November speech in Dallas that he’s urging House Republicans to introduce a bankruptcy bill “so that states like California and New York and Illinois that think they’re going to come to Washington for money can be told, ‘You know, you need to sit down with all your government employee unions and look at their health plans and their pension plans.’”
“Frankly, if they don’t want to change, our recommendation is you go into bankruptcy court and let the bankruptcy judge change it,” he said.
States were left out of a Depression-era law that lets municipalities reorganize their finances under Chapter 9 of the bankruptcy code. No legislation has yet been introduced to allow states to seek court protection from creditors.
What this boils down to is state and federal policymakers are working behind the scenes to come up with a new way to allow states declare bankruptcy and get out from under crushing debts. Obviously, existing jobs are on the chopping block, but this could also affect retirees living on a state pension
Bottom line if you’re a P2P lending investor: lending money to a federal or state employee isn’t a sure thing.
In my opinion, a P2P lending loan to state government employees are just as risky as private sector jobs until the economy rights itself. Moreover, depending upon the state (in particular – California, Illinois, New Jersey), a state government employee with just a few years on the job might be a higher risk than someone with equivalent experience working for a multinational, publicly traded corporation.