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.