State Budgets: The Day of Reckoning

By now, just about everyone in the country is aware of the federal deficit problem, but you should know that there is another financial crisis looming involving state and local governments.

It has gotten much less attention because each state has a slightly different story. But in the two years, since the "great recession" wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes. There is also a trillion dollar hole iln their public pension funds.

The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.

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The Next Financial Meltdown
The day of reckoning is at hand. Steve Kroft tells us what we need to know about the looming financial crisis that almost no one is talking about.

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Full Segment: The Day of Reckoning
Extra: New York State's Budget Woes
Extra: How It Got So Bad
Extra: Can NJ's Finances Be Fixed?

"The most alarming thing about the state issue is the level of complacency," Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft

Whitney made her reputation by warning that the big banks were in big trouble long before the 2008 collapse. Now, she's warning about a financial meltdown in state and local governments.

"It has tentacles as wide as anything I've seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," she told Kroft.

Asked why people aren't paying attention, Whitney said, "'Cause they don't pay attention until they have to."

Whitney says it's time to start.

California, which faces a $19 billion budget deficit next year, has a credit rating approaching junk status. It now spends more money on public employee pensions than it does on the state university system, which had to increase its tuition by 32 percent.

Arizona is so desperate it sold off the state capitol, Supreme Court building and legislative chambers to a group of investors and now leases the buildings from their new owner. The state also eliminated Medicaid funding for most organ transplants.

Then there's New Jersey. It has the highest taxes in the country, a $10 billion deficit and a depressed economy when first-year Governor Chris Christie took office. But after looking at the books, he decided to walk away from a long-planned and much-needed project with New York and the federal government to build a rail tunnel into Manhattan. It would have helped the economy and given employment to 6,000 construction workers.

Gov. Christie acknowledged that's a lot of jobs. "I canceled it. I mean, listen, the bottom line is I don't have the money. And you know what? I can't pay people for those jobs if I don't have the money to pay them. Where am I getting the money? I don't have it. I literally don't have it."

Asked if this is going on all over the country, Christie told Kroft, "Yes. Of course it is. It's not like you can avoid it forever, 'cause it's here now. And we all know it's here. And the federal government doesn't have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's comin'."

And nowhere has the reckoning been as bad as it is in Illinois, a state that spends twice much as it collects in taxes and is unable to pay its bills.

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[familyman05]

Illinois is pathetic, not only are they dead-beats when it comes to paying businesses, real-estate owners, and charities ... state retirees are often unable to stay with the same doctor because Illinois doesn't pay the claims. So retirees are forced to either pay out of their own pocket or find a new doctor. ...and this isn't a fat-cat retiree I'm talking about, this is the 80+ year old spouse of a retired state trooper. Why is the governer receiving his paycheck? How far behind are his checks?

[Frenchi1]

REPUBLICANS cripples the educational budget of public schools in Florida. Simultaneously, they cheap shot the teachers and their powerless unions. Then the strategy is to comment on how the schools look bad. Then It became a HOAX because in spite of the REP efforts to demolish public schools, they remains very well evaluated among the best in the nation (REP hate that). Here come Jeb from heaven with attorneys selling virtual schools. This is Neil Bush's company.
"In 1999, Bush co-founded Ignite! Learning, an educational software corporation.
As of October 2006, over 13 U.S. school districts have used federal funds made available through the No Child Left Behind Act of 2001 in order to buy Ignite's products at $3,800 apiece.
Now take a look at the investors:
"To fund Ignite!, Bush raised $23 million from U.S. investors, including his parents, as well as businessmen from Kuwait and the United Arab Emirates. Documented investors include Russian billionaire expatriate Boris Berezovsky, Berezovsky's partner Badri Patarkatsishvili, Kuwaiti company head Mohammed Al Saddah, and Chinese computer executive Winston Wong."
Wow, doing business with MUSLIMS and CHINESE????
No way; THE BUSHES?? What's next? The Bin Ladens?
Sorry, they have been doing business with the Bin Ladens for more than 30 years.
In Florida, you know by now who are our republicans employer

[greyghost3]

I've been sending messages to President Obama and almost all US Governors in hopes of making them realize our infrastructure and freight transportation ,ay be a solution.

We are running an outdated systenm of freight transpoprtation on an infrastructure, roads, $2.2 trillion in dis-repair costing US billions of dollars a year in traffic congestion, auto repair, injury, death, and health care costs just to name a few.

www.b4dcfreight.com is a site I started to create a network of freight shippers, brokers, and motor carriers throughout the nation so as to have available frieght as close as possible to freight being delivered for several reasons. Ck out B4DC Links and you will find facts from www.supplychainbrain.com from the FHWA site, and many more which make it clear we are wasting billions and can turn this economy around if we bring freight transportation into the 21st century through IT.

I would suggest all states get with freight shippers and offer tax incentives to geton board, get motor carrriers loaded inside two hrs so carriers can remain compliant with FMCSA HOS, Hrs of Service which CSA2010 is currently looking at as well as all motor carriers safety records.

Give motor carriers who get on board with electronic logs, pre-pass, and GPS tax incentives for tolls, pallets, and other expenses because they are going broke as independent carriers and when coprorations are handed the industry as farming, banking, and oil through campaign finance we will be paying much mor efor everything we buy.

If we set up a system through which freight shippers, brokers, and carriers connnect to reduce deadhead miles, {we had 29 million in 2002, 20%of total freight miles 145,173 million were empty trucks and we pay $200 billion a year due to traffic conegstion according to the US Dept. of Commerce.

If a truclk leaving any styate in the nation has freight at their destination we can reduce deadhead miles, traffic congetsion, accidents, health care costs, and more.

Get truck shops to do inspections {the FMCSA now does} by certifed mechanis, graduates of tech schools and set up a system between truck shops and the FMCSA so records are kept much like medical records and the direction schools are going with Brord band.

Ck out www.b4dcfreight.com and ask why your representatives refuse to act on all the facts I have on the links page?

Every problem we face as a nation is a direct result of what our representtaives do so maybe it's time to speak up instead of whine about how we as indivduals and states are going broke?

[FrankDenise]

I am just so scared that I have no ideas how Iam going to survive anymore..I have taken a paycut from my 16 year union job..Iam taking home 600 dollars less a month,my bills have gone up monthly as well.Gas and home heating oil prices are sky high and I am behind on my mortgage payment..the scariest part is I beg for help from Bank Of Unamerica and to no aveil...They say I make too much money for a modification which is a joke that they base it on your pretax income,,,If I got that money I wouldnt need any help..My wife has helped as much as she can but I also have a 6 year old daughter that she takes care of as well..All we are trying to do is have a small piece of the american dream but they cant even let us enjoy that because we are pretty much poor.All our money goes to paying the bills and we have no money for anything else..It sucks so bad that this government has practically destroyed our dreams,,What is wrong with this picture if I work a full time union job everyday and still cant pay my bills..What the hell is wrong with this country...We are so stressed out all the time over money its sometimes feels like its not even worth it to keep trying..Just go on welfare like the other lazy bastards and live off the others and have less worries.Because we can barely keep our home anymore and noone seems to care or want to help us..Bank Of Unamerica is a disgrace they way they treat us hard working americans who are facing hard times..I have been in my home for 8 years and only have had problems the last year and a half since the pay cut and they pretty much told me there is nothing they can do..Really nice way to treat us..I hope they keep hell reral hot for these greedy bastards who could care less about anyone but themselves...All I can do is pray for Strength and hope for better times..I love this country dearly but not the disgraceful people who run it inot the ground for their own benefits not the people....God Bless Us All................

[EliminateCIT]

Jersey Shore pension plan looks to be $100 Billion underfunded. This 'Situation' needs a miracle.

The top story in the NYTimes Sunday written by Michael Powell highlights the difficulties in New Jersey between the paying taxpayers and the receiving retired State pensioners. (Public Workers Facing Outrage as Budget Crises Grow, http://www.nytimes.com/2011/01/02/business/02showdown.html?_r=1&ref=us).

So I pulled up the NJ State Pension Plan and dug into the numbers to see where the State stands (http://www.state.nj.us/treasury/pensions/pdf/financial/2010divisioncombined.pdf).
Bottom line is that after working thru the numbers, I calculate that by year end 2010, the NJ plan stands between $89 - $113 billion underfunded (or only 44.6% to 38.7% funded) on a market value basis using a reasonable discount rate on its pension benefit obligation. By any measure, if this were a corporate pension plan, the PBGC would have entered the building and taken over the plan by now. It is one very sick Snookie.

As a State, New Jersey is looking to have revenues of $28 billion this year.
The breakdown =
$10b personal income taxes
$8b sales taxes
$2b corporate income taxes
$8b other taxes
(http://www.state.nj.us/treasury/omb/publications/11citizensguide/pdf/citguide.pdf)

If the $89-113 billion in pension underfunding was amortized over 30 years, the State would need to fund an added $3-3.75 billion per year into the plan just to keep member benefits intact. To do so would require either a 30-40% hike in the NJ personal income tax rate or a 40-50% hike in the NJ sales tax rate. Both moves which would create a flood of overloaded UHauls to stream out of NJ for less taxed states. If taxes were not raised and the $3-3.75 billion came out of member benefits, given the $11.9b in paid benefits for FY2011, this would amount to a 25-30% cut in retiree payments. If the answer to a solution is a split in cost between the taxpayers and the pensioners, then this will still make for a very difficult outcome for all New Jersey taxpayers and pensioners and will likely cause future economic difficulties for the State as taxpayers leave and pensioners suffer increased economic difficulties.

Of course a better option is for New Jersey to grow its way out of its pension underfunding problem. Not only should New Jersey repeal its State corporate income tax and become a more attractive place to host employers but if the US Federal Government also eliminated its corporate income tax, the move would bring millions of jobs back to the US, allow for the repatriation of $1 trillion in capital to flow into the US and the upward move in the US equity market caused by increased earnings would cause a 500-1,000 basis point increase in the NJ pension plan funding level. This increase in the funding level could buy the plan some time to work out options to save the benefits for its retirees whereas right now it has few good options.

Math on the NJ State pension plan:
$74.6 billion = known 6/30/10 Actuarial Assets
$69.0 b = estimated 6/30/10 Market Value Assets (NJ uses 5 yr smoothing of gains/losses)
$45.8 b = 6/30/10 Actuarial Value Underfunding (funding = 66.0%)
$51.4 b = 6/30/10 Market Value Underfunding (funding = 57.3%)
$120.4 b = 6/30/10 Pension Benefit Obligation (PBO) using a 8.25% discount rate
$159.5 b = 12/31/10 PBO using a 6.0% discount rate
$183.6 b = 12/31/10 PBO using a 5.0% discount rate
Note: US Corporate Pension plans moving toward 5.1% for discount rate in 2010, average long term AA Corporate Bond yield is 5.25% and 30 year US Treasury yields 4.25%.
$71.1 b = 12/31/10 Market Value Assets (assuming 3% gain in 2nd half of 2010)
NJ plan has 23.6% of plan invested in US equities.
NJ plan has about 33% of its members retired.

www.eliminatecorporateincometax.com

[dc19812]

Blame the public sector unions. Plane and simple. The states are a non profit organization, they receive most of their money through taxes. When teachers are getting a 4.9% raise every year and free health benefits with free medical when they retire and a pension at 60-80% of their last three years of pay there is a problem. That problem normally doesnt happen with multi billion dollar companies who make more and more profit every year. States on the other hand only get whay they take in from taxpayers. So its simple to fix get rid of the public sector unions and get rid of their rediculous benefits package and outrageous pensions. Its unaffordable. Anyone who thinks different look at this study http://www.cato.org/pubs/journal/cj30n1/cj30n1-5.pdf this a 50 year look at public sector unions and what they have done to the state and government budgets. Like chris christie said, you cant pay out more than you take in.

[bondsaidick]

Whitney's predictions are not only ludicrous, but irresponsible. I've covered state and local finances for 35 years over 6 recessions. I also know that while pension funding needs to improve, nearly all pension funds are years away from running out of cash to pay benefits, and are not near insolvency. She has done a disservice to responsible state and local officials, and has recklessly damaged the portfolios of investors that enjoy the overwhelming safety of the municipal bond market. Hundreds of billions of muni defaults? Bah, HUMBUG!!!

[BIGuru]

Just Google under Google News, pension funds running out of cash - you will get plenty of results.

[C_Darrow]

This issue is as complicated as Prohibition. Government pensions are not a gift. They are an insurance policy. The big difference between the United States and other countries is that here the rule of law is preeminent. No small part of why it is preeminent is the independence of our judiciary. Without a sufficient government pension, only three kinds of lawyers will drawn to these positions: the very wealthy, those who want to play God, and those who are willing to supplement their regular salary with contributions to their "personal retirement plans."

There are places in this world where the rule of law goes to the highest bidder. We don't want the United States of America to become one of them.

[C_Darrow]

I don't want to make it appear that I believe that the need for government pensions applies only to judges. The same reasoning applies to governors and legislators. Also, qualified and capable public school teachers who are already underpaid and overworked would doubtless seek other employment. What will be the quality of those who replace them? This is short-sightedness at its worst. We don't want a culture in which people slip $100 to the cop on the street to make a crime go away, or $50 to a clerk at the license branch to certify that an applicant passed a vision test that he failed. Do we?

[presswatch1]

The more I think about it, this 60 Minutes report -- with astonishingly not a single counter-veiling view to the lone analyst presented repeatedly -- seems to have been made to order and perfectly tailored to align with the interests of those deep-pocketed hedge funds who are placing bets on the decline of our country's municipal bond market. You have to wonder, what influenced the producers to come up with such a one-sided, one analyst report? And on 60 Minutes? No doubt some in the financial news business must be wondering the same.

[_ENDIF_]

Wait.


Is this the newest incarnation of the welfare queen myth?