States are bankrupt whether they can declare it or not

Thursday, January 20th, 2011

By FRANK KEEGAN – Memo to Newt Gingrich and the Center on Budget and Policy Priorities: Taken as a whole, the states are bankrupt already – with at least $18 trillion in hard debt that’s not on the books. Gingrich said in a recent speech, according to a transcript on his Web site, that Congress should “in the first month or so” pass a state bankruptcy law. CBPP said Thursday the fiscal situation is “exaggerated.”

According to CBPP, the overall “fiscal situation of states and localities” does not “require drastic and immediate measures … to avoid an imminent meltdown,” because “modernizing revenue systems” – tax and fee increases – coupled with a “budget processes … overhaul” will solve the problem over the next few decades.

Gingrich said “states like California and New York and Illinois that think they’re going to come to Washington for money” can forget it, and “I would make the federal bankruptcy law prohibit tax increases as part of the solution.”

They’re both wrong.

So far Gingrich hasn’t found any sponsors to introduce his bankruptcy bill. But CBPP, instead of fighting it, should find a wise Democrat in Congress to push it through.

This national crisis is bigger than Republican or Democrat, left or right, conservative or liberal. It requires radical action now to prevent certain future calamity.

In 2009 we hit a tipping point. For the first time in history, states paid more for “Insurance Trust Fund Expenditures” – mainly pensions — than for “Salaries and Wages,” according to Final Fiscal Year 2009 State Government Finances data just released by Census.

Basically that means we are paying those who no longer work for state governments more than we pay those who do. The trend is intractable and accelerating.

Coupled with a 19 percent loss in the value of trust fund investments and a $477 billion negative swing in trust fund revenue from 2008, states passed a fiscal event horizon into a black hole they never can escape. To get out, they would have had to earn at least 48 percent in 2010. They didn’t.

If current spending and hidden indebtedness continues beyond this year, no future draconian tax increases and spending cuts can save them.

Any efforts to save prodigal states by extorting money from the relatively healthy ones will just drag more and more states into the abyss, leading to a cascade of fiscal catastrophes.

And even if federal bailouts were politically feasible, it’s not fiscally feasible. Uncle Sam is broke.

If state pensions were the only problem, leaders might be able to work it out over time. But the latest census numbers do not include more than $530 billion in unfunded retiree health care promises, according to pre-recession calculations by the Government Accountability Office.

Another comprehensive GAO study — again using pre-recession numbers — calculates aggregate state long-term liability at $9.9 trillion, requiring real operating spending cuts equal to 12.3 percent a year beginning in 2009 and every year for the next 50 years.

Such cuts did not begin in 2009, so the true debt plus interest has grown.

The GAO study accepted delusional state assumptions on pension fund earnings and growth subsequently proven false by the Great Recession, so it’s safe to add at least $3 trillion to that number.

And GAO did not include $2.7 trillion in unfunded liability for state natural catastrophe insurance programs or $2.2 trillion in vital infrastructure beyond design life that must be replaced or refurbished over the next five years.

Add it all up and you get more than $18 trillion in real, hard hidden debt states must start paying off now even as reckless spending and borrowing continue.

All of this is at a time when state and local government tax revenues through the third quarter of 2010 are $22 billion above the record high in 2007. Yet despite tax revenues higher than just two years before, operating budget deficits are – optimistically — $26.7 billion for the current fiscal year and at least $82.1 billion next year, according to the National Conference of State Legislatures.

CBPP projects $125 billion in 2012 operating deficits for all states. So, even with tax revenues returning to historic levels, our leaders are spending even faster than they can squeeze it out of beleaguered citizens.

But wait, it gets worse. This off-the-books debt tally does not include at least $40 billion – and growing – the states owe the federal government for unemployment insurance loans they must start paying interest on this year.

It does not include billions more owed the federal government for Medicaid.

It does not include unknown billions in sucker-punch financial deals such as variable rate demand obligations, auction rate securities and interest rate swaps that state and local officials fell for.  The Securities and Exchange Commission is trying to figure that one out now.

Nor does it include deferred casualty and liability “self-insurance” premiums, sale and leaseback of government assets, borrowing to pay current expenses, shifting payroll into the next year, unpaid contractors and suppliers, and all of the other accounting tricks our politicians have used to delay the day of reckoning.

Well, the day of reckoning is here.

It’s time to put any political posturing and maneuvering behind us. This one is historic even if the conflicting estimates are only half right.

State bankruptcy must be part of the solution because whether they can declare it or not, our states as a whole already are bankrupt.  

Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com . Any disgusted public employee, journalist, activist organization or citizen watchdog who wants help exposing government waste, fraud and abuse may contact him at: frank.keegan@franklincenterhq.org .

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6 Responses to “States are bankrupt whether they can declare it or not”

  1. [...] and municipalities are in for 50 years of deep cuts, best case.   Worst case? My estimate is $18 trillion as of 2009, with more than 50 years of even deeper cuts.   As for the true federal deficit, [...]

  2. [...] because of relatively low apparent tax burden.   The hidden real total is at least $18 trillion, about 15 months of total U.S. gross domestic product.   Here are some things to [...]

  3. [...] hidden real total is at least $18 trillion, about 15 months of total U.S. gross domestic [...]

  4. [...] bond ….” The only problem with that is under current standards for state and local government accounting and reporting, it’s virtually impossible to find out how deep in debt any state or local government really is. [...]

  5. [...] only problem with that is under current standards for state and local government accounting and reporting, it’s virtually impossible to find out how deep in debt any state or local government really [...]

  6. [...] case? My estimate is $18 trillion as of 2009, with more than 50 years of even deeper [...]

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