Months ago, I recall writing a short post on the possibility of state debt crises with a very specific focus on California. I also mentioned the numerous state-run pension systems that were being used from late 2006 onwards as dumping grounds for investment banks' mortgage-market mistakes, and what kind of a burden that would translate into for those already-starved systems.
Well, according to the FT, those pension liabilities, when combined with healthcare obligations, have now risen to $1 trillion (and may be as much as $3 trillion in the long-run) above what states can pay. The piece's title, 'US states struggle in the shadow of Greece', is supposed to hint that, with states facing such a mounting gap between revenues and outlays, debt crises may threaten us on this side of the Atlantic as they do to our swarthy neighbors on the other.
Its author is quick to pull back the scare tactics, noting that municipal bond markets have remained stable despite a very poor budgetary outlook for the year. Many states are prohibited from borrowing, and for many others a balanced budget is non-negotiable, meaning that spending cuts and tax hikes have been pursued aggressively. What really challenges state governments is not necessarily the possibility of default, but the fact that the stickiness of the economic downturn is threatening their ability to slash-and-burn their way out of the red. At a certain point, taxes can't go any higher, and public outlays any lower, without a severe political backlash. There is a wall, and it's going to be hit sooner or later.
If revenues still don't match obligations, states will have no choice but to lean more heavily on bond markets. But, as I wrote all those months ago, new bond issuances are usually a terrible idea: they're relatively expensive (rates hover between 6 and 10 percent) and, used to plug immediate holes in payroll and essential services can't be invested for any return, exacerbating future budgetary distress. The Feds, as part of last year's stimulus package, introduced subsidized 'Build America' bonds, effectively guaranteeing a new source of debt for states and local governments and transferring the burden of servicing it to themselves. While not a bad idea, it's less a solution to the underlying problem (too many states have been bleeding cash for years) and more a bit of sleight-of-hand that delays a reckoning by following the age-old tradition of shipping our troubles off to the Potomac with a smile and a prayer.
In the end, in the absence of healthcare reform and an overhaul of public pension management, there will be no way to escape a collapse of state finances. Whether that comes as a slow deflation of budgetary balloons or a sudden nosedive is up to Washington, which needs to make an effective attempt to prevent a future financial crisis. It's too bad that, for now, that sort of federal muscularity is only a pipe dream.
Subscribe to:
Post Comments (Atom)
Posts
"What really challenges state governments is not necessarily the possibility of default, but the fact that the stickiness of the economic downturn is threatening their ability to slash-and-burn their way out of the red. At a certain point, taxes can't go any higher, and public outlays any lower, without a severe political backlash. There is a wall, and it's going to be hit sooner or later."
ReplyDeleteAnother argument for more federal stimulus. Last I read, the first round of federal spending has been more or less nullified by the implosion of state expenditures. The counter-cyclical policy so far has been countered. We're getting something close to a fiscal wash at the moment. At least, that was true last time I read anything about it.