States Facing Financial Doomsday

States Facing Financial Doomsday as Debts Mount

That’s not some apocalyptic bumper sticker. It’s the learned opinion of numerous financial experts when describing the budget crises facing a number of U.S. states, notably Illinois, California and New Jersey.

“This is an unprecedented crisis,” said Laurence Msall, president of the Civic Federation, an influential Illinois-based tax and fiscal policy research group.

While a General Motors-style bankruptcy is off the table – states are prohibited by law from filing for protection from their debtors – the alternative is no less alarming.

Msall said that in a worst-case scenario, states sliding toward insolvency will simply stop paying their bills, whether they be to public colleges, private vendors or municipalities. And when they do, those entities will either have to eat the losses or make up the difference.

It’s already happening in Illinois, Msall said, where the state has reneged on payments promised to public colleges, and those colleges in turn have threatened 20% tuition increases.

Private vendors, as they did last year in California, will have to accept government vouchers – IOUs in effect – or lose their money, and municipalities will have to raise property taxes in order to cover their own expenses.

In other words, the money needed to keep insolvent states running at some minimum operational level will have to come from somewhere.

Last month the non-partisan Civic Federation released a set of proposed reforms targeting Illinois’ $13 billion budget deficit. The proposals are nothing short of draconian, going so far as to support dramatic tax increases, but only after the Illinois state legislature has committed to public employee pension reform and other deep spending cuts.

Msall stressed that his group’s proposals are focused on Illinois, but Illinois is hardly unique.

When Msall describes Illinois politicians who have “made promises they can’t keep” he could be speaking of politicians in just about any state.

Ask just about any objective expert in the realm of government fiscal policy and they’ll say the same thing: politicians have largely brought these financial crises on themselves, trying to please too many people by promising to spend money they don’t have.

The politicians then exacerbated their state’s woes by turning a blind eye to rapidly escalating budget deficits, consistently overestimating revenue while ignoring rising expenditures. All with an eye toward re-election, naturally.

Consider the $2.73 trillion owed by the 50 U.S. states to public employees in pension, health care and other retirement benefits over the next 30 years.

A recent study by The Pew Center on the States called Promises with a Price revealed that the states are currently about $731 billion short on those payments, some states in far more trouble than others.

Any fix is going to require significant political will on the part of the politicians charged with fiscal responsibility, according to the report’s authors.

“In good times and bad times, states have kicked the can down the road,” said Kil Huh, research director for the Pew Center on the States.

Huh said the problem remains solvable, but that the clock is ticking.

“By being disciplined about paying their annual contribution, and keeping an eye out for costs – either controlling costs or cutting costs – they can get a handle on their long-term bill,” he said. “But if states continue to ignore this bill then it will become an unmanageable crisis.”

New Jersey Governor Chris Christie has conceded as much and is now facing an all out political war with state and municipal workers whose contracts, benefits and pensions Christie says are too generous, and if left untouched will eventually bankrupt the state.

The state’s budget deficit is expected to range from $8 billion to $11 billion by mid-2010.

Christie has called for renegotiating public employee contracts and scaling back on benefits for new employees. He has also called for a spending freeze and across the board cuts, including layoffs, in order to right New Jersey’s fiscal course.

The political battle with the various unions that represent public employees is sure to be bruising.

California, the largest state in the U.S., spends $17 billion each year on government employee pensions and health care, and that figure is believed to be rising by several billion a year. The state’s budget deficit is expected to hit $20 billion this year, prompting Orange County Supervisor John Moorlach to tell a local newspaper he believes California is heading for an “economic meltdown” unless things change.

“I think we are already technically bankrupt,” he said in a recent interview.

In Illinois, the state widely regarded as wallowing in the deepest financial hole, the Civic Federation has proposed cutting retirement benefits for new public employees and slashing state spending by at least $2.5 billion.

If Illinois’ politicians can muster the political will to enact those reforms, then the group supports increasing the state’s individual income tax from 3% to 5% and the business income tax from 4.8% to 6.4%.

Said Civic Federation’s Msall, “We are not pleased to be recommending $2.5 billion in spending cuts and major pension reform, but only then would we support tax increases. Leaders have to do their part first.”

Msall believes “the severity of the cuts” would dramatically change the way Illinois funds education and local government, and would likely result in increased property taxes and the loss of federal matching funds earmarked for education, health care and other social services.

But the worst thing Illinois could do is nothing, Msall said. The longer the state waits to enact reforms and cut spending, the deeper the fiscal hole gets and the more expensive it will be to dig itself out.

“There is a dwindling opportunity for the state of Illinois to effectively address its financial crisis. Time is of the essence. The longer you wait, the worse it will get,” he said.

Via Fox News

Check These Related posts:

1. Doomsday Predictions Tax Illinois
2. More States On Brink
3. Governors Facing Troubles
4. Broke States Pose Threat
5. Hawaii Fiscal Crisis