Fascinating, if depressing, analysis in the February 11, 2011 issue of The Week magazine regarding the dire economic straits of our state governments. As a word of caution, please do not read the following if you have a weak stomach or you actually think the economy is going to get very healthy in the next few years (it is not):
- According to the Illinois state comptroller, Illinois is basically a “deadbeat state” that had to raise its personal income tax rates 66% and has simply stopped paying the money it had previously committed to schools and a host of other creditors. The Week had reported in 2010 that bullet suppliers to Illinois law enforcement agencies had stopped shipping them bullets because the state government had not paid its outstanding bullet bills.
- California is issuing nonredeemable IOUs in an attempt to keep its creditors at bay.
- Arizona has sold off its state House and Senate buildings, obviously a one time, desperate grab for cash.
- Arizona’s state Medicaid fund has stopped covering organ transplants.
Camden, New Jersey, the second most dangerous city in America, just laid off 167 of its 373 police officers.
- The National Association Of State Budget officers expects state tax receipts to fall off 6.5% below 2008 levels and it estimates that it could be up to five years before tax receipts recover to 2008 levels.
- Despite this fall off in revenue, Medicaid and state employee pension obligations will continue to rise under contracts signed when the economy was healthier. Thus, if overall revenues go down, Medicaid and state employee pensions go up, in all likelihood schools, roads, bridges, social support programs, etc. will receive less and less money over time.
- One social program that is already in deep trouble is the money used by state and local governments to bury indigent people who have passed away. For example, in Wayne County, Michigan, the county that includes Detroit, the local government finances are so bad and short that the local coroner cannot afford to bury 185 bodies and has to just store them in a vault. Some of the bodies have been there for over two years, with no sign that funds will be available soon to bury them.
- Federal stimulus money, which had been delaying the pain of revenue shortfalls, are almost all used up.
- All but ten states are expected to post deficits this year requiring budget cuts or tax hikes to get back in balance.
- In total, all states are expected to be about $140 billion short of revenue to cover costs, with five states, California, Texas, New Jersey, New York, and Texas accounting for about half of the $140 billion. Every U.S. household would have to be assessed an additional $1,200 in taxes just to cover the shortfall.
- Andrew Cuomo, the new governor of New York, is proposing deep cuts in state Medicaid benefits to the poor, wage freezes for state workers,and the elimination of some state agencies.
- New California governor, Jerry Brown, is proposing $12.5 billion in budget cuts that will hit state universities, welfare programs, and healthy care for the poor along with the continuation of tax increase for a variety of state taxes.
State government employee pensions systems are facing a $1 TRILLION shortfall in unfunded pension obligations. To cover this shortfall, every U.S. household would have to come up with just under $9,000 in additional taxes which does not include the $1,200 estimate above to just close the current budget deficits.
Nasty, ugly situation. Can experts quoted in the article offer an insights on how to solve the problem:
- Felix Rohatyn, an investment banker who steered New York City through a bad budget time in the 1970s: “I don’t like to play the scared rabbit but I just don’t see where the end of this is.”
- Jerome Powell of the Bipartisan Policy Center: “Governments are the biggest employers in the country. To have spending cuts and tax increases is going to be a burden on economic growth for years to come.”
- New Jersey governor Chris Christie: “No one can be shielded from this reality anymore – not policemen, not firefighters, not teachers.”
- Financial analyst Meredith Whitney who predicted the subprime mortgage collapse: “The debt crisis in states and cities is the largest threat to the U.S. economy. It has tentacles as wide as anything I’ve seen.”
Great, even the so-called experts do not see an ending to this fiasco that is a good ending. The article concludes there are only two solutions, both of which are very painful:
1) Severe cuts across the board in all state and local government services including either massive give backs by government employee unions regarding pensions and health care or substantial layoffs.
2) Changes in Federal law that would allow state and local governments to go through a bankruptcy process, purging itself of its debts and obligations, allowing it to begin anew with a clean financial slate. However, the article points out that there is a significant downside to the bankruptcy solution. It points out that the last U.S. state to default on its debt was Arkansas in 1933. While it cleaned up its financials, it ruined its credit rating making it a “financial pariah” for a very long time, so long that the state government could not get financing to build a single road for over 16 years.
Nothing pretty about the situation or the solutions. However, the most insigthful comment in the article was from Governor Chris Christie when he told a disgruntled police officer at a recent town meeting, “Don’t be angry at the first guy who told you the truth.” The numbers are too overpowering, too big to ignore, the truth can no longer be avoided. The above situation is the reality and at least one politician, Christie, understands this reality. Understanding reality is the first step back to dealing with reality.
Unfortunately, until we find a way to change election laws, processes, and mindset, we are going to be stuck trying to solve the above problem with the same people that got us into the situation to begin with, the American political class.
And the same problem the states are facing are orders of magnitude worse at the Federal level. We are about to hit a $14 TRILLION debt level within weeks at the Federal level, a debt load that will burden every U.S. household with about $120,000 in debt in addition to the $10,000 or so that the state and local governments have burdened every household with.
The big question is when will someone of importance take the same stand that Christie took, understand reality, and tell it like it is? Given the inept and feeble attempts by Obama and the rest of the political class, both Republican and Democrat, to understand the financial chaos reality at the Federal level and lead the country through the difficult choices, we are in a potential death spiral that is only going to get worse.
To break this death spiral, the following steps, at a minimum, need to be implemented by a leader with some courage and backbone, one that currently does not reside at 1600 Pennsylvania:
- Step 1 – reduce government budgets and expenditures by 10% a year for five years in order to root out and kill non-essential programs, expenses and costs, wasteful spending, redundant government functions, and political earmarks.
- Step 2 – step up law enforcement activities to reduce fraud and criminal embezzlement of government programs such as Medicare.
- Step 3 – eliminate the traditional pension benefit for all newly hired Federal government employees.
- Steps 4 – put Social Security on a solid financial basis by raising the retirement age, reducing or capping payouts to wealthy Americans, and uncapping the income maximum while reducing the Social Security tax rate.
- Step 5 – repeal the costly Obama Care program and replace it with a program that actually addresses the true root causes of our health care crisis while reducing health care costs.
- Step 6 – bring back most of the U.S. troops deployed overseas, we can no longer afford to police the world with our troops.
- Step 7 – make Congressional pay raises based on performance and quality, not automatic.
- Step 8- prohibit any Congressional member who has a net worth of over $3 million to draw a salary while in office.
- Step 9 – And the most important step of all, impose strict term limits on all political offices. The real reason why we are in this economic jam is because our politicians continue to give away financial stability and common sense in order to get either votes or campaign donations for their next.
As long as they can run for office again, they have and will make the nation’s well being subservient to their election needs. Whether that is giving earmarks to campaign donors, sweetening the pay, retirement, and benefit packages of unions, etc., the opportunity to get re-elected has to be removed in order to free up office holders to do the right thing.
You cannot ignore reality and the reality is not good. The pain will come and the pain will be severe. By not taking pre-emptive action at the state and local levels, taxpayers and citizens are being made to suffer tax increases and service cuts. By not taking action at the Federal levels, similar bad things will happen to good people. The longer we wait, the worse the pain will be.
And given the absence of term limits, the absence of a plan to address the reality, and the absence of courage and fortitude at all levels of the political class, with the possible exception of Governor Christie, nothing will get done until after November 2012, a two year delay that will just make the eventual pain that much worse.
By: Bruno Korschek