Skip to comments.States In Crisis: Where Is Your State on the Dysfunction Scale?
Posted on 07/30/2010 12:55:58 AM PDT by dennisw
On a sunny morning, 70 middle school students hop off the school bus and cram themselves into a classroom originally meant to seat 20 kids. Taking notes while trying to avoid your neighbors' elbows is hard, but the hardships these students face are nothing compared to the ones challenging the thousands of state workers recently laid off.
If you're a resident of one of the most troubled states in America, here's a glimpse of what's to come: higher taxes, layoffs of state workers, longer waits for public services, more crowded classrooms, shorter school years, higher college tuition and less support for the poor and the unemployed.
But for those of you living in places that aren't in such rough shape, don't get too comfortable. Think about this: The 10 states in the worst financial condition account for more than one-third of America's population and economic output.
The Pew Center on the States, a nonpartisan think-tank based in Washington D.C., recently used California as the poster child for fiscal dysfunctionality. The Pew Center identified the six factors most responsible for California's ongoing fiscal woes and then scored the other 49 states on how similar they are to the beleaguered Golden State.
The six factors are (1) high foreclosure rates; (2) increasing joblessness; (3) loss of state revenues; (4) relative size of budget gaps; (5) legal obstacles to balanced budgets -- specifically, a supermajority requirement for some or all tax increases or budget bills; and (6) poor money-management practices. The results are in the table below, with California being assigned thenumber of 30.
The health of individual states is important because the United States' recovery from the Great Recession depends heavily on the degree to which states emerge from their economic doldrums. But the actions needed to repair finances in the 10 most vulnerable states -- think higher taxes and lower government expenditures -- could slow down the entire nation's economic recovery.
The immediate problem, and the one dysfunctional states like California, Rhode Island, Arizona, Michigan, Oregon, Nevada, Florida, New Jersey, Wisconsin and Illinois, are dealing with, is the requirement that they balance the budget every year. States are forbidden from running deficits. That doesn't mean they can't borrow money to fill the holes. It just means that for every dollar that goes out, whether to debt payments, pension obligations, education, welfare or Medicaid, there must be a corresponding dollar coming in.
But if all states have to balance budgets, why are some in such terrible shape?
Simply put, the states in the most trouble have put off difficult decisions for decades. They have not been willing to finance expenditures with tax dollars. They did not put aside money in "rainy day funds" like many of their healthier neighbors. Instead, they kicked the can down the road by borrowing money, making accounting adjustments, and making promises to change things in "the future." Add one recession to the recipe and you end up with a handful of states that may be past the point of no return.
State governments can plug holes by borrowing, selling assets, reducing expenses, increasing revenues or, if they're feeling creative, using accounting tricks or asset grabs.
They can also just ignore the problem altogether by refusing to pay their bills, a strategy that Illinois has been using all year.
Because the state government refuses to either raise taxes or cut spending, Illinois simply stopped paying the roughly $4.7 billion in unsecured payables it owed to public schools, rehabilitation centers, child care providers, the University of Illinois and other unsecured creditors as of the beginning of July. The University of Illinois has been stiffed on 45% of its state appropriation this year and legislators helpfully suggested that the university borrow the money and wait for the state to pay them back.
Arizona went the asset-sale route. It sold the buildings that house its Senate and House of Representatives as well as the State Capitol Executive Tower. The deal allows the state to use $735 million in sales proceeds to fill its budget gap and in return it will pay rent to its new landlords for 20 years.
In 2009, Hawaii cut expenses by going to a four-day school week, a move that more and more states are exploring. As of now, there is little official data on the performance of students in 4-day versus 5-day school districts, but many superintendents have used anecdotal evidence to illustrate negative impacts on students with a shorter school week.
Other states are just desperately trying to grab whatever is available. To fund the state's university system, Colorado is trying to get its hands on a $500 million surplus from Pinnacol Assurance, a state workers' compensation insurer that was privatized in 2002. Many other states have used the still theoretical federal health care dollars to balance their budgets. These are dollars that Congress has not even appropriated yet, but have already been "spent."
Even with all the acute crises that have developed, the bond market has largely shrugged off concern for state governments. Because states cannot declare bankruptcy, they cannot discharge or restructure debt. Investors believe that if any state got into real trouble, the federal government would intervene. And most experts agree the federal government would have little choice but to help out any state that defaulted on legal obligations to bondholders or pensioners.
States, too, have put structures in place to build investor confidence. In New York, a trustee intercepts tax revenues and makes some bond payments right off the bat, before politicians can get their hands on the money. California has a "continuous appropriation" for debt payments, so bondholders know they'll get paid regardless of whether the rest of the budget is approved.
But even in a best-case scenario in which states muddle through the most acute phases of this crisis and come out intact, these budgetary problems are not merely recession-related problems. The states, and indeed the federal government, are dealing with long-term challenges that will eventually require action.
Take pensions, for example. Pensions are just another form of debt. They are an obligation that must be paid out year after year. States don't have to disclose how much they owe retirees, and I'll give you one guess why state officials across the board refuse to value their pensions at market rates -- the results are horrifying.
As described in the New York Times series, Payback Time, Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of all 50 states' pension obligations the way the bond markets value debt. They put the total obligation at $5.17 trillion, though only $1.94 trillion has been set aside in state pension funds. The $3.23 trillion gap is more than three times the amount the states owe bondholders.
"When you see that, you recognize that states are in trouble even more than we recognize," Rauh said.
And regardless of whether the states have enough money in their pension funds, they are legally bound to pay retirees' benefits. Once pension funds are out of money, the benefits have to be paid out of general revenue. In Illinois' case, pension obligations would eat up about half the state's cash every year. Since this would more or less bring state operations to a halt, any state caught in this predicament would likely head to D.C. for assistance.
After all this, it's not difficult to imagine a future in which a higher and higher percentage of tax revenue goes toward benefits for retirees and interest on debt payments, leaving less and less for those things that receive a lot of lip-service about being important: schools, public services, roads, unemployment benefits, etc.
It's also not hard to imagine a future filled with socio-economic and generational strife, as workers in their prime earning years have taxes skimmed off to pay for promises politicians made to pensioners years ago.
I don't believe it. I want video.
I’m really surprised that my state (NY) isn’t running a close second to CA. It sure feels like it with no end in sight.
The insanity is still shocking to witness.
I agree. Reads like BS.
Fire Marshall might have something to say about that sort of classroom loading.
Also, that list has my state, Georgia, in worse shape than NY. I don’t buy it.
Gov Beebe (Democrat):
This week, I submitted a balanced-budget proposal to the joint houses of the General Assembly, in preparation for the upcoming legislative session. Arkansas is known for its history of fiscal restraint, as our Constitution prohibits deficit spending and requires the State budget to be balanced. My budget recommendations reflect this spirit in their conservative approach an approach I believe is especially necessary in the face of the ongoing financial crisis and an uncertain economic
Providing meaningful tax relief to working families is another essential feature of this budget proposal its a promise I made to the people of Arkansas, and one I intend to keep. In 2007, we enacted the largest tax reduction in Arkansas history by cutting the grocery tax in half; but I promised it would not end there. Ive asked the Legislature to cut an additional penny from the sales tax on groceries this year. While economic times are tight and tough decisions must be made with regard to spending, I believe the greater harm would be to go back on my word to the people of Arkansas. Middle-class, working families are the heart of State and of our economy, and they deserve this help.
I call shenanigans.
“On a sunny morning, 70 middle school students hop off the school bus...”
One thing school districts can do is get rid of a large chunk of the school buses. Where I live, they bus the darlings distances where the kids could walk. I know because as a lass, there were no school buses and I walked to and from school. Since the Obamas are so worried about childhood obesity, walking to and from school might give the little mites some much needed exercise.
Iowa: No oil, just ethanol.
Nebraska: No. 20 in oil production. (has ethanol, too, and a big natural gas play in the offing out west.)
Montana: No. 13 in oil production. Coal, too.
North Dakota: No. 4 in oil production, coal mining, gassification and electricity exporter.
Texas: No 1 in oil production.
Pennsyvania: No. 19 in oil production, with the Marcellus shale Gas play too.
Utah: No. 12 in oil production, despite federal lease revocations.
New Mexico: No. 7 in oil production.
South Dakota: no 24 in oil production.
West Virginia: No 21 in oil production, vast coal reserves.
While California is number three in oil production and Alaska is number two, (not sure why Alaska is so badly off in this study), policy may account for that, especially in California's case.
Only the throttling of the extractive industries, those which take a patch of dirt and make something of it, can kill economic recovery. Farming and ranching are two industries which make something from sweat and dirt, but do not forget the tremendous amount of fuel used. Killing the oil industry will negatively impact 11 of the top 12 states directly, and indirectly as agricultural industries there take a hit, too. Shutting down coal mining will do much to complete the task.
Anyone wonder why the EPA is pushing the AGW line so hard? Why they want to shut down anything burning 'fossil fuels'?
To complete the job they started with the bank bailouts--the complete destruction of the American Economy--and every bit of looting that can be accomplished by Obama, his backers, and their cronies before the final push to make this a totalitarian state.
My daughter’s school wanted the town to vote for a new school. They had a teacher arrive with a video camera one lunchtime and herded two classes of children into one classroom. Some kids were even lined up along the windows.
This video was presented at a schoolboard meeting.
Well, well, there was my little girl in the video. Next day I asked her about that picture.......ha ha ha.......she told me exactly what happened. They were taken out of the cafeteria and told to sit at the desks, some two to a desk for the ‘movie’.
The manipulation by those in power is revolting especially because they’re making plans for spending OUR money.
This is from PEW. They are pro amnesty. You'll notice that there is no mention of illegals among CA's woes.
Abolishing the EPA would go a long way to helping the economy.
We're generally a long way from the days when rivers caught fire because they had that much crap in them.
Since then, the agency has just kept environmental standards a moving target, and that hasn't helped industry here at all.
Many of the refining and manufacturing facillities were dismantled and shipped overseas when they could no longer comply and make a profit.
Imho, the agency has outlived its usefulness, and the jobs lost there could be readily made up for by industrial expansion. Regulation should occur at the State level, anyway, where the balance between clean and industry is in the back yards of the people who live there. Interstate compacts could handle shared interests as well as any Federal Agency, problably better.
Glen Beck predicts we are going to have deflation followed by mega-inflation as they monetize the debt.
He may be right. When the prices crash, the trick will be to have enough to get what you need to survive or even hedge your assets against the inflation. At some point the dollar won’t be worth squat unless the other currencies in the world do the same. That leaves beans, bullets, bullion, and land...
He seems to be ahead of the rest who are in denial. I think the Fed is losing the ability to create inflation. Scary. We are in for it next year.
All the ARMS from 2006 are going to re-set. This will cause total chaos.
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