The states budget crisis about to get much worse

Insolvency is no longer just for California. The dreaded word "bankruptcy" is now being whispered in Chicago.

While it appears unlikely or even impossible for a state to hide out from creditors in Bankruptcy Court, Illinois appears to meet classic definitions of insolvency: Its liabilities far exceed its assets, and it's not generating enough cash to pay its bills. Private companies in similar circumstances often shut down or file for bankruptcy protection.
"I would describe bankruptcy as the inability to pay one's bills," says Jim Nowlan, senior fellow at the University of Illinois' Institute of Government and Public Affairs. "We're close to de facto bankruptcy, if not de jure bankruptcy."

Suppliers in Illinois are not being paid (an average 92 day delay in payment), worker salaries are unreliable, and the University of Illinois may not be able to make payroll this spring.

Illinois has joined California and Arizona by having budget deficits of larger than 40% of their overall budget. This is coming after a disastrous year in 2009.
There is simply no more fat to cut from the budgets. The cuts will now be going to the bone with possible full amputations of parts of the social safety net.

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In Arizona this means budget tricks like pilfering private donations to the state parks, borrowing against the lottery and early-child development fund, and deferring funds to universities.

“The reason why the state deferred the payment is that the state has no money,” said Rep. Ed Ableser, D-Tempe, “Our budget situation has prevented the treasurer from releasing payment.”

The 2nd tier states, states in which the budget deficit is between 30% and 40% of total budgets, are not in much better shape. These state include: Alaska, Nevada, New Jersey and New York.

New York's deficit of $7.4 Billion is the 4th largest nationwide and will have to agree to a budget by April.

In his fiscal 2011 budget, Gov. David Paterson proposes cutting billions from school aid and state agencies, as well as closing four prisons, legalizing ultimate fighting and increasing taxes and fees by $1 billion.
"There are no more easy answers. We cannot keep spending money that we do not have," Paterson said in a written statement.

In New Jersey, Republican Chris Christie may have won the election, but his task is sisyphean. Per capita, New Jersey is in far worse shape.

"We have the largest budget deficit per person of any state in the union. We have the highest tax rates in the nation ... Today, a new era of lower taxes and higher growth will begin."

Unlike cities and counties, there is no legal mechanism for states to declare bankruptcy. So how Christie will manage to cut taxes and still balance the budget despite having the largest budget deficits per capita is beyond my imagination.

Nevada already ranks 50th in K-12 school quality and 48th in spending per student, but that didn't stop the governor from looking to cut school spending further this year.
The biggest money grab from the Nevada schools comes from redirecting school bond construction money to operational expenses.

School District officials say such a move would be a gross breach of trust with voters who approved the bond measure in the belief that the proceeds would be used solely to build campuses and fix older ones.
If the capital dollars were used for other purposes, federal tax penalties likely would be incurred by the individuals, businesses and organizations that invested in the bonds, experts say.
If the Legislature were to order the district to divert construction dollars elsewhere, “it’s likely the IRS would have a problem with that,” said attorney John Swenseid, who serves as bond counsel to the School District. “I’d imagine the bond buyers would also be very unhappy.”

His solutions go much further than that. It includes "privatizing several state services including prison medical care, building and grounds maintenance, mail and purchasing".

Of course no one beats California when it comes to bankruptcy. California is likely to be issuing IOUs again this year. Even after deep cuts in health care, education, and social services, the Governator's budget still requires a $7 Billion bailout from the federal government - a bailout that is unlikely to happen. Even in the unlikely scenario of the federal bailout happening, the proposed budget is likely to fall well short of actually balancing the budget.
The state's debt was already ranked the lowest in the nation, and is getting downgraded even further.

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This, of course, isn't a complete list of states that are in trouble. In fact, there are very few states that aren't in trouble. States like Alabama are already counting on a second federal stimulus package to balance their budget, even though that legislation hasn't been created yet.

The money from the first stimulus package is going to start running out, and then the states will be in a world of hurt.

“I believe that the states across the United States will face deficits a year after stimulus ends of $300 billion to $500 billion a year,” Ravitch told about 200 people gathered at New York University’s Robert F. Wagner Graduate School of Public Service.

After jobs, the state budget crisis will probably be the biggest political hot-potato of the 2010 campaign season.

Comments

Here is a proposal:

Interesting idea:

A $500 per capita Federal distribution to all the States to sustain employment in essential services, service debt, and reduce the need for State tax hikes. This can be repeated at perhaps 6 month intervals until GDP surpasses previous high levels at which point state revenues that depend on GDP are restored.

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So we'll be left with a huge

So we'll be left with a huge federal tax bill to maintain employment for state workers? This is just a regurgitation of the stimulus package which is targeted at keeping a specific group of people employed while sending the bill to everyone.

At some point this putting off till tomorrow what we can do today way of doing things has to end.

If the politicians do not have the cohones to raise taxes back to where they were before Reagan then we have to cut entitlement programs and on the state level cut employment. My state gives a 3% annual cost of living increase for all retirees and doesn't tax state pensions either. I can't get that in my business because someone has to pay the bills.

We cannot have our cake (supporting entitlement programs, bailing out the financial system and maintaining high government employment levels with golden retirements) and eat it too (lowering taxes for the wealthy)- something has to give.

My state like Illinois has also put off payments on their pension funds in order to balance budgets. Its going to catch up on us. Its catching up to us right now.

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This is not a problem that will be solved w/ more time.

This is more than municipal and state jobs. This goes to basic services including law enforcement. States and municipalities are about get hit really hard when real property starts being reassessed lower because of real estate prices including commercial.

I agree about raising taxes but now is not the time - we need counter cyclical measures right now.

We are seeing the ramifications of "tax cuts ALL the time every time".

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Laughing at That

My town sped up its revaluations so they could avoid criticism.

My house was valued by Zillow at $724,000 at its peak in 2007.
The local tax evaluated it at $525,000 in the summer of 2009 and at that point Zillow showed it at $325,000.

One has nothing to do with the other. The local tax evaluations have more to do with what they need rather than what the homes are worth at least thats been my own experience.

We are also seeing the ramifications of 'don't worry it always goes up' and out of control entitlement programs that didn't exist when taxes were much much higher.

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It's different in each state

Where I live property is reassessed every 3 years. Right now our assessors office is inundated with appeals. In some counties if you can show at least 3 comparable arms length/non-foreclosure sales you can get your property reassessed lower.

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The Market is Still Frozen

I'd be hard pressed to show 3 comparable non foreclosure sales in my area right now. I see what you are saying though. Our revaluation laws need to be tightened up considerably to protect homeowners from unfair taxation.

Lets say though that we had iron clad revaluation laws here and they were forced to lower values. Then they would simply get an exception for the rate increase and increase the rate till it raised revenue by what they wanted. We have a very weak 4.5% rate limit that can be over ridden in 4 ways. Its useless.

Say there was no over ride available though. How would the town get around state and federal education mandates or union contracts mandating levels of employment and class size etc. Employment levels also apply to fire and police - they are bullet proof.

They will simply tax you till you cannot pay and then they will seize and sell the property. That or Chapter 9 which the state here must approve.

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Even better, lets eliminate

Even better, lets eliminate property taxes all together. They have existed only recently in the timeline of our history. You are only renting from the government if they can seize your property because of property taxes.

10th Amendment needs to be pushed hard here and decentralize govt as the constitution mandates. This will be a huge step to force it to live within means.

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Oregon

Oregon has ballot measures, 66, 67 to raise taxes. The problem is they are misrepresenting the taxes, even in the ballot pamphlet.

It took me forever to figure this out. They are literally taxing gross receipts, i.e. gross income, i.e. gross sales.

So, if a business does $500k in sales, regardless if their operating costs are $1 M, they are going to get taxed.

i.e. taxed even with a $500k yearly loss.

I swear to God, do Democrats know how to screw something up or what? They didn't bother to just close the loopholes which enables corporations to write off things that shouldn't be written off to avoid taxes, esp. using other state and national tax codes to do it...

they didn't bother to really analyze the state corporate tax code...

nope, they did this, which of course is going to shut down a host of small businesses who hire workers.

This is with around a 11% unemployment rate.

BTW: this is why all corporate tax codes tax net, not gross....because of course all businesses have major expenses, operating costs ....like salaries, wages, benefits, retirement they must pay for and so no one in their right mind would want to tax those because if a business has problems and doesn't turn a profit, they now have an additional tax liability on top of things.

Honestly, I didn't believe it and normally never listen to those "anti-tax" rants and I think everyone on this site knows I've been pro a host of new tax innovations....

but this is just stuck on stupid.

It's no wonder to me voters keep flipping parties since neither one can do anything that makes plain common sense.

On this one, I had to go dig out the actual legislation and it took forever to analyze for I couldn't believe someone would put together a tax that was so obviously detrimental to job growth and small business.

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What makes you think it's accidental?

Governments eat money -- it's what they do. Whoever controls the government wants money, and there are taxes in place that provide cash flow. People hate to pay taxes so they figure out tax avoidance strategies -- it's what they do. It costs me about a week's work to pay the taxes on my office, but I do do get a few things in return -- fire, police, roads, ambulance, etc. But get a new tax on the ballot and people will vote it down. So they sneak new ones in that don't require voter approval (read your phone or electric bill and you find some of them).
Then there are the other taxes you don't see. The Fed has figured out a clever one -- tax the savings of ordinary Americans so the banks can have a "free money" subsidy. They do this by keeping interest rates so low that savers are robbed of the time value of money while banks reap a windfall. If that ain't transfer of wealth, I don't know what is. BTW, my understanding is that the discount window is there for banks (like GS?) who "need" the money -- -- the discount window for these birds should have been slammed shut long ago. They;re doing fine on their own.

Frank T.

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Frank T.