Friday, September 4, 2009

State of Shock

Greetings good citizen,

You’re sick of hearing it and I’m sick of moaning about it so we’ll skip today’s unemployment numbers and press ahead with another catastrophe the MSM pretends doesn’t exist.

You’ve been hearing about it locally because it’s a local problem. The media is reluctant to report the decaying budgetary situation of the states, cities and towns because it contradicts the claims of ‘green shoots’ and ‘global economic recovery’.

How the hell can we be on the edge of an economic ‘rebound’ when municipalities across the nation are furloughing workers and slashing social programs while hiking taxes and raising fees? Short answer, we can’t, so we aren’t.

Which leads us to tonight’s offering purloined from The Automatic Earth.

(While this is just Ilargi’s ‘intro’, the whole post is well worth the effort.)

States of shock

Ilargi: An article at the excellent MyBudget360 site says Californians may soon be able to claim 92 weeks of unemployment benefits. The beyond bankrupt state already pays out $80 million in unemployment insurance per day!.

"So far this year California has dished out some $11 billion in unemployment insurance. This is the biggest amount on record, dwarfing the previous record set last year at $8.1 billion."

While that may sound like a lot of money, in actual fact 365 days of $80 million really adds up to almost $30 billion. California has a $60 billion hole in its budget this year. Looks like that hole is about to get a whole lot bigger.

A judge in Rhode Island has refused to block that state governor's plan to shut down the government on selected days. Seeing that, I was thinking that the union that asked the judge for the decision must have no idea what's coming for its members. A few days of unpaid leave is hardly the worst thing that is going to happen.

As I was reading these things, I figured it might be a good idea to take a look around for more news on state budget problems. Part of me wishes I'd never had that brilliant thought. Within minutes I had some 40 articles lined up, just from one day. I stopped looking, but there's no doubt I could have gathered dozens more where that came from.

I first started talking about these developments years ago, it was very obvious what was coming. This budget year, the mayhem has started for real, and it's really only beginning.

At state level, a mountain of trouble is brewing in America.

A few random thoughts when reading the articles:

There are lots of political fights ongoing. Having to cut budgets will do that for you. Several states have seen their budget problems taken to court. In some cases, parties are rolling over the floor for budget cuts of 2-3-4 percentage points. Whoever is involved in any of those fights is up for a rude sunrise, since in many cases, tax revenues are already off by 10-20%. I haven't seen one state that doesn't admit to at least a few hundred million in budget deficits, with losses predicted to grow rapidly in years to come.

In some cases, it's so hard to agree on a budget that deadlocks often last for months. Connecticut and Pennsylvania still don’t have a deal. Connecticut's governor will likely pass the budget without signing it. Without a budget in place on a set date, state lockdown often automatically follows.

At this point, many states still have rainy day funds. But they are limited and depleting fast. And the chances of tax revenues increasing are slim, in the face of rising unemployment numbers, while those same numbers foretell rising expenditures for benefits.

There is no doubt that all states, with perhaps 1 or 2 exceptions, will go into the next fiscal year with a budget that is far too optimistic. This is how politics works. Whatever can be made tomorrow's problem will be. And tomorrow's problems are set to be huge.

In a typical example, Arizona, like many states, is bound by law to balance its budget, but still came up with a $500 million shortfall over the past fiscal year. From a legal point of view, that is very thin ice. From a financial one, it's a nightmare.

States will increasingly try to push their troubles onto counties, who in turn will lean on municipalities. This will lead to a slew of lawsuits, which will paralyze decision making and cause a lot of bad blood. Politicians won't be looking to tackle the issues as best they can, they will try to handle them in such a way that their chances for (re-)election don't get hurt. This is a surefire recipe for wrong decisions if ever there was one.

State leaders are reluctant to lay off their employees. It’s bad politics. It’s much less damaging for their careers to cut funding for the sick, the old, the young, the handicapped and the homeless, who either don't vote or are unlikely to change their voting habits and even more importantly have no unions to raise a racket on their account. That is why they will be the first victims of the cuts, along with schools and their students, health care services etc.

We are about to see a huge increase in the issuance of state bonds and other forms of borrowing. Kicking all your cans down all the roads that you can find. Many states are in the process of opening some kind of gambling den or another.

And then down the line will come the tax increases, stealthily at first, more openly later. But raising taxes on a population that is getting poorer fast is a stillborn idea, especially at the lower levels of government, where people know where you live.

To understand the underlying justification for budget cuts that are way too meagre, for not properly tackling problems and for issuing even more debt, you only need to look at the White House and its message of recovery and 3.5%-4% economic growth right around the corner. That message undermines the need for more unpopular measures at the state level, even as revenues are falling much faster than that.

Even if those predictions would come true, states' financial problems will persist for many years. If the predictions turn out to be too optimistic, the ensuing mess for the states will be hard to oversee. Politics trumps sound decision making. Looks like time to start culling the herd.

There is of course much more to say on the subject. And I will. For now, though, here's a few articles on the topic for your reading pleasure:

I’m pressed for time tonight good citizen so I’ll end this one here, if you desire further reading, follow the link, there’s hours more to be had there.

Thanks for letting me inside your head,


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