Five days before a House panel is set to hold a hearing — “State and Municipal Debt: the Coming Crisis?” — governors are insisting that municipal securities are among the safest investments and that states are keenly aware of the need to repay their obligations.

“In contrast, the mere discussion of legislation, let alone the existence of a law allowing states to declare bankruptcy, would only serve to increase interest rates and create more volatility in bond markets,” members of the National Association of Governors warned House and Senate leaders in a letter Friday.

Several Republicans in Congress have been exploring the idea of crafting legislation to permit states in severe financial distress to file for bankruptcy protection so that they can renegotiate their debt, union contracts, pension plans, and other obligations.

The hearing on municipal debt is to be held Wednesday by the House Oversight and Government Reform Committee’s panel on TARP and financial services, which is chaired by Rep. Patrick ­McHenry, R-N.C.

The top Democrat on the subcommittee is Rep. Mike Quigley from Illinois, a state whose pension disclosures have been under review by the Securities and Exchange Commission.

McHenry told The Bond Buyer in a recent interview that the hearing would focus on states’ short-term fiscal problems, such as their loss of revenue and budget gaps, as well as long-term problems like unfunded pension liabilities and whether states’ pension disclosures are adequate.

Also on Wednesday, three House Republicans — Reps. Devin Nunes and Darrell Issa from California, as well as Paul Ryan from Wisconsin — are expected to introduce a bill that they have said would improve state and local pension disclosures. Issa chairs the full House Oversight and Government Reform ­Committee.

Sources say the bill will be similar to, but will contain some changes from, a measure the three lawmakers introduced in December. That bill would have prohibited states and localities from issuing new tax-exempt debt or receiving federal subsidies on taxable debt if they did not file annual reports on their pension plans with the Treasury Department that complied with uniform standards.

In their letter to lawmakers, NGA members said: “For the last three years, states have faced growing budget deficits and in each of those years, they have closed those deficits by spending cuts and when necessary increasing taxes. Governors and legislators have had to make tough and politically unfavorable decisions to be fiscally responsible and balance our budgets. Throughout this process, our colleagues never contemplated walking away from our obligations to our constituents or to the bond markets by requesting that the federal government allow states to receive bankruptcy protection.”

The bankruptcy proposals being explored “suggest that a bankruptcy court is better able to overcome political differences, restore fiscal stability, and manage the finances of a state,” the governors said. “These assertions are false and serve only to threaten the fabric of state and ­local finance.”

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