Individual US States Face Unconcealable Fiscal Crisis

Because of the on-going US economic crisis – which continues to worsen, doctored numbers from the Department of Commerce to the contrary – they are getting hit in TWO different ways:[br]

revenues from individuals and companies in their own states are way down AND the Federal government, which has in the past had a plethora of programs that helped states get by, has practically nothing to give them because it’s given it all to the TBTF banks / insurance companies etc.

Consequently, many states are now facing unprecedented budget crises – which means concretely they have huge financial obligations that vastly outweigh their current and potential revenues, and no clear way to meet them .

As noted by this article in the New York Times, this is creating potentially intractable problems for almost all the individual states in the Union:

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.

Some economists fear the states have a potentially bigger problem than their recession-induced budget woes.

If investors become reluctant to buy the states’ debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt. …

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.

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…

… states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future.

One ploy reminiscent of Greece has been the use of derivatives.

While Greece used a type of foreign-exchange trade to hide debt, the derivatives popular with states and cities have been interest-rate swaps, contracts to hedge against changing rates.

The states issued variable-rate bonds and used the swaps in an attempt to lock in the low rates associated with variable-rate debt.

The swaps would indeed have saved money had interest rates gone UP.

But to get this protection, the states had to agree to pay extra if interest rates went down.

And in the years since these swaps came into vogue, interest rates have mostly fallen.

Swaps were often pitched to governments with some form of upfront cash payment — perhaps an amount just big enough to close a budget deficit.

That gave the illusion that the house was in order, but in fact, such deals just added hidden debt, which has to be paid back over the life of the swaps, often 30 years.

Some economists think the last straw for states and cities will be debt hidden in their pension obligations.

Pensions are debts, too, after all, paid over time just like bonds.

But states do not disclose how much they owe retirees when they disclose their bonded debt, and state officials steadfastly oppose valuing their pensions at market rates.

Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.

After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion —

more than three times the amount the states owe their bondholders.