Friday, December 7, 2012

The next fiscal domino to fall?

We've mentioned the financial and budgetary problems faced by US states several times before.  Now a couple of articles bring renewed focus on this very important issue, which is often neglected in comparison to the federal budget deficit and national debt.

First, the Washington Times reports that California unions are putting pressure on that state's ruling Democratic Party to expand its already out-of-control government spending even more.

Obamacare doesn't go far enough. The government needs to replace private insurance companies in a complete takeover of health care.

That’s the system California’s union leaders are pressuring Democrats to create, now that they enjoy supermajorities in both chambers of the state Legislature.

. . .

Along with proposals to eliminate private insurance companies, raise taxes on everything from oil to luxury cars and remove barriers to higher property taxes, California's powerful public-sector unions want the state to spend $68 billion on a bullet train and increase public pension payouts to consume almost 20 percent of local budgets.

. . .

Californians already voted to raise their own taxes by passing Proposition 30, Gov. Jerry Brown’s plan to balance the state budget by temporarily raising the sales tax as well as the income tax rate on people who make more than $250,000 a year.

Supporters of Proposition 30 raised almost $70 million to promote the ballot measure, far more than the $54 million opponents of the measure were able to raise, according to, a nonpartisan research organization based in Berkeley, Calif. Almost all of the money opponents raised came in the final month of campaigning, when polls showed voters were actually likely to approve the measure.

. . .

And where did California come up with the money to support Proposition 30? Six of the top 10 donors were unions.

There's more at the link.  California is perhaps the worst offender in this regard, but you can confidently expect other serial offenders like New York, Illinois, etc. to follow suit.  Unions dominate the Democratic Party in such states, and will demand the same response from the legislators they 'own', particularly after having 'delivered' their support to President Obama during last month's elections.

Next, John Mauldin brings us a trenchant analysis of pension funding shortfalls in many state and local governments by Ed Easterling.  Here's a brief extract from his multi-page report (link is to an Adobe Acrobat document in .PDF format).

The implications [of the pension funding gap] are significant.

First, public pension plans have very large gaps to fill as well as ongoing shortfalls. Solutions must be dedicated to shore up the plans. Policy makers must resist the temptation to use pension reform as a way to fund obligations outside of the plans.

Second, solutions will require additional contributions that will further challenge the budgets of state and local government employers. The magnitude of the additional funding will only increase with delay. Every year that additional funding is missed compounds and concentrates the problem into fewer future years.

. . .

Additionally, there are significant implications for citizens. Budget shortfalls at the state and local level will drive higher taxes: income, property, sales, and other taxes. Higher taxes among the broad citizenry to fund retirement benefits — where the benefits are greater than in the private sector — may generate resentment and unrest. Such emotional responses often result in less‐rational solutions. Higher taxes and social anxiety can lead to slower economic growth, which can reduce standards of living over time.

. . .

The solution to public pension woes is not a stopgap series of contributions; it will require fundamental reform to address the ongoing effects of the existing conditions. A successful solution requires an accurate assessment of the problem. An inaccurate assessment begs disaster. Without a comprehensive solution, the likely actions will be marginal plugs introduced with hope that ultimately result in ineffective results.

Again, much more at the link.

All this must, inevitably, lead to a demand that the federal government make up the shortfall in state government income - effectively, a bailout of the states.  It will probably also extend to some of the larger cities, which are bankrupt in all but name.  (We saw the first open, unambiguous demand like that from a Detroit politician a few days ago.)  The fact that the federal government is already more than $16 trillion in debt means nothing to such self-centered, self-interested unions and their tame legislators.  If the states are up to $4 trillion in the hole in terms of their pension obligations and shortfalls, as Mr. Easterling suggests, they'll simply demand that the federal government add that $4 trillion to its existing debt load.  After all, what's $4 trillion between friends?


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