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States, Cities at Center of Latest
Bankruptcy Threat
By Pat Shannan
Everyone is aware of the
central government’s deficit problem, but another financial
crisis looms over state and local governments. In the two years since
the new recession wrecked their economies and shriveled their incomes,
the states have collectively spent nearly a half a trillion dollars
more than they have received through taxes, and there is a
trillion-dollar hole in their public pension funds.
The states have scooted by on billions of dollars in federal stimulus
funds, but the day of reckoning is at hand. Many cities have reached
the point of no return and with more than a few states not far behind,
the debt crisis is creating a need for a new stimulus package that, if
put in place, would likely spell doom for the already-collapsing dollar.
Respected Wall Street analyst Meredith Whitney stirred up the financial
world by telling Steve Kroft on 60 Minutes that municipalities and
states are next, and bankruptcy is all but certain.
“There is not a doubt in my mind that we will see [50 to 100]
municipal bond defaults in the next 12 months,” said Whitney on
Dec. 19.
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Arizona is so desperate that it has sold off several of its state
buildings to private investors and leased them back at a reduced
monthly cost—a temporary Band-Aid at best. Illinois currently
pays out twice what it collects in taxes. Gas stations refuse to sell
fuel to the Illinois State Police without cash payment because the
state’s credit card is no good.
New Jersey cancelled plans to build a rail tunnel to New York
City—a project that would have created 6,000 jobs for
construction workers—because there was simply no money to fund
it, according to Gov. Chris Christie. Instead, he had to get rid of
1,300 state workers, and is still facing a $10 billion deficit in 2011.
Colorado, Minnesota and South Dakota have all taken the unusual step of
reducing the benefits they pay their current retirees by cutting
cost-of-living increases; retirees in all three states are suing. With
Philadelphia and San Diego reeling as two of the largest cities
drowning in debt and nearing bankruptcy, they both lost the race for
the dubious honor of being first to tiny Prichard, Ala., where the
coffers are empty. In December, the town reneged on sending out monthly
pension checks to 150 retired city workers.
The town’s police protection and garbage collection may be next.
Detroit’s mayor may already have cut these services in 20 percent
of his city by the time you read this.
“Prichard is the future,” said Michael Aguirre, the former
San Diego city attorney, who says San Diego should declare bankruptcy
and restructure its own outsized pension obligations.
“We’re all on the same conveyor belt. Prichard is just a
little further down the road,” said Aguirre.
When British economist John Maynard Keynes proposed this plan of
inevitable financial destruction in his 1920 book Economic Consequences
of the Peace, he was asked about these consequences “in the long
run.” “In the long run,” Mr. Keynes replied, “I
will be dead.”
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(Issue
# 1 & 2, January 3 & 10, 2010)
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