The day of reckoning is at hand! With massive budget deficits raining on the spending parade states and cities have been enjoying for years, some serious decisions will soon have to be made to avoid insolvency. Sadly, the easy solutions are no longer an option. As states and cities look at the grim reality of their budgets they will have to either significantly increase taxes or slash spending on all levels. Or they can just crawl back to Washington begging for another bailout – further inflaming the problem.
It’s a State Problem
The year 2011 is going to be a tough year for most state governors. With a cumulative deficit of $140 billion, governors will have some tough choices to make. Masking that level of deficits will not be an easy task. California has done it for years and it bond rating is teetering on junk status. The AP elaborates on the states’ predicament:
Twenty-six states elected new governors last month — 17 Republicans, eight Democrats and one independent — and now they are going to have to reconcile their principles and campaign promises with some harsh fiscal realities: This is the worst budget climate for the states in at least a generation.
Cumulatively, the states face budget shortfalls of nearly $140 billion next year, according to the Center on Budget and Policy Priorities, a Washington think tank. To make matters worse, billions in aid to states from the federal government’s $800 billion stimulus plan is set to dry up early next year.
The incoming governors face some painful and politically unpopular decisions, with the easy fixes long gone. Among the unsavory alternatives: tax increases or deep cuts in programs voters hold dear, such as education, public safety and health care.
Arizona, Illinois, Maine, Nevada, New Jersey, Maine, North Carolina and Vermont face the toughest budget shortfalls, with gaps exceeding 30%! Click here to view the CBPP’s full report on the state budget crisis.
It’s a City Problem
If the state governments have budget woes then you know their cities do as well. The Guardian is actually predicting that more than 100 U.S. cities could go bankrupt next year.
More than 100 American cities could go bust next year as the debt crisis that has taken down banks and countries threatens next to spark a municipal meltdown, a leading analyst has warned.
Meredith Whitney, the US research analyst who correctly predicted the global credit crunch, described local and state debt as the biggest problem facing the US economy, and one that could derail its recovery.
“Next to housing this is the single most important issue in the US and certainly the biggest threat to the US economy,” Whitney told the CBS 60 Minutes programme on Sunday night.
“There’s not a doubt on my mind that you will see a spate of municipal bond defaults. You can see fifty to a hundred sizeable defaults – more. This will amount to hundreds of billions of dollars’ worth of defaults…”
US states have spent nearly half a trillion dollars more than they have collected in taxes, and face a $1tn hole in their pension funds, said the CBS programme, apocalyptically titled The Day of Reckoning.
Detroit is cutting police, lighting, road repairs and cleaning services affecting as much as 20% of the population. The city, which has been on the skids for almost two decades with the decline of the US auto industry, does not generate enough wealth to maintain services for its 900,000 inhabitants.
It’s Your Problem
New Jersey Governor Chris Christie summarized the debt problem best on 60 Minutes:
“We spent too much on everything. We spent money we didn’t have. We borrowed money just crazily. The credit card’s maxed out, and it’s over. We now have to get to the business of climbing out of the hole. We’ve been digging it for a decade or more. We’ve got to climb now, and a climb is harder.”
The problem with climbing out of the hole that our governments dug is that the solutions are not going to be pleasant. As Bloomberg stated previously, the significant level of cuts necessary to avoid collapse will test the bonds of “social cohesion.” Some folks will not take to kindly to having their benefits and pensions cut, which could very well cause the rioting scene that is on display all over Europe to become common place here at home.
Watch the CBS 60 Minutes special on the state and city debt crisis for more details. It is a little long, but it’s good.