|
The
New York Times files this report on the growing debt load of states
around the country and how it is even bigger than official numbers indicate.
California,
New York and other states are showing many of the same signs of debt overload
that recently took Greece to the brink — budgets that will not balance,
accounting that masks debt, the use of derivatives to plug holes, and armies
of retired public workers who are counting on benefits that are proving
harder and harder to pay.
And
states are responding in sometimes desperate ways, raising concerns that
they, too, could face a debt crisis.
New
Hampshire was recently ordered by its State Supreme Court to put back $110
million that it took from a medical malpractice insurance pool to
balance its budget. Colorado tried, so far unsuccessfully, to grab a $500
million surplus from Pinnacol Assurance, a state workers’ compensation
insurer that was privatized in 2002. It wanted the money for its university
system and seems likely to get a lesser amount, perhaps $200 million.
Connecticut
has tried to issue its own accounting rules. Hawaii has inaugurated a
four-day school week. California accelerated its corporate income tax this
year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their
budgets with federal health care dollars that Congress has not yet appropriated.
That
last one is a gem – the expectation that billions of dollars are coming
from Washington, these billions just getting tacked on to the $1.6 trillion
federal budget deficit and the $13 trillion national debt.
The
fundamentally flawed assumption of state bureaucrats appears to be thinking
that tax revenues will, at some point, return to their late-1990s/early-2000s
heydays in support of the late-1990s/early-2000s spending heyday, to which
both the state legislature and the population at large have grown accustomed.
Amazingly,
California – the poster-child for state budget deficit troubles –
doesn’t look so bad when its obligations as a percent of GDP are
compared to the 49 other states.
California’s
stated debt — the value of all its bonds outstanding — looks
manageable, at just 8 percent of its total economy. But California has big
unstated debts, too. If the fair value of the shortfall in California’s
big pension fund is counted, for instance, the state’s debt burden more
than quadruples, to 37 percent of its economic output, according to one
calculation.
The
state’s economy will also be weighed down by the ballooning federal
debt, though California does not have to worry about those payments as much
as its taxpaying citizens and businesses do.
Unstated
debts pose a bigger problem to states with smaller economies. If Rhode Island were a country,
the fair value of its pension debt would push it outside the maximum
permitted by the euro zone, which tries to limit government debt to 60
percent of gross domestic product, according to Andrew Biggs,
an economist with the American Enterprise Institute who has been analyzing
state debt. Alaska
would not qualify either.
State
officials say a Greece-style financial crisis is a complete nonissue for
them, and the bond markets so far seem to agree. All 50 states have
investment-grade credit ratings, with California the lowest, and even
California is still considered “average,” according to
Moody’s Investors Service. The last state that
defaulted on its bonds, Arkansas, did so during the Great Depression.
The
rest of this is well worth reading and you might want to do so before the NY
Times starts charging for access.
The
parallels between Greece and states like New Jersey and California are all
too clear – the use of derivatives to make conditions look better than
they really are, looming pension liabilities where the true costs are
obscured, and a host of other issues.
It
makes you wonder why the credit ratings agencies are so sanguine.
Tim
Iacono
Iacono
Research.com
Tim Iacono is the
founder of Iacono Research which provides market commentary and investment
advisory services specializing in macroeconomic analysis and commodity based
investing. He also writes the popular blog The
Mess That Greenspan Made.
|
