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.
“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.
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.