The State And City Financial Time Bomb Ticks Louder

The financial crisis has too many pieces to follow even if it is being resolved and brought to an end as many experts expect. The end is still far off, at least as long as unemployment stays high and consumer credit continues to shrink. Recently, the focus of the public and politicians has been on the furious fight over the cost and shape of national healthcare and the possibility of a third stimulus package that would primarily be aimed at extending unemployment benefits, eventually for millions of people.

Lost among all of this confusion is what has happened to the states and municipalities, many of which have a deeply compromised ability to raise money to pay their deficits. Tax receipts are down along with their credit ratings. The People’s Republic of China is not a ready purchaser of their debt.

In the shadow of the national financial crisis, the trouble at the local level is getting much worse and getting worse quickly. Bloomberg recently reported that California Governor Arnold Schwarzenegger said he will know within a month whether a $1.1 billion drop in revenue collections in his state is part of a growing budget shortfall or an isolated event. The huge and rising number of unemployed and under-employed could certainly cause the collection problem. California, only recently at the brink of a financial calamity, could be back there again shortly.

The Washington Post published a special report on state and municipal pension funds. The paper wrote “Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers.” States and municipalities have lost about $1 trillion in the markets. That $1 trillion problem gets to vie for capital with the $1.6 trillion federal budget deficit and the $1 trillion healthcare reform package. To paraphrase Senator Everett Dirksen who died 40 years ago, “A trillion here, a trillion there, and pretty soon you’re talking real money.”

Politicians at every level still want to believe, or at least have voters think that they believe, that everything is going to be alright with the economy and financial system. It will only be a matter of time before GDP growth will return to 5% or 6% and the deficit, healthcare, and local government costs and obligations will pay for themselves. The idea of things paying for themselves has never really worked, even in times of severe inflation. The consequences of the debt are only pushed a little way out into the future.

A number of cities and perhaps one or two states are still at risk for either insolvency or such severe cutbacks in services that they may not look like governments at all. Several municipalities in Michigan are in receivership, most notably Flint which was once one of the largest industrial cities in the car industry. Several others like Pontiac may still become wards of the state. In these towns the numbers of police are cut, so are the number of firemen, school teachers, and sanitation workers. The areas become small collections of chaos and neighborhoods no longer linked to one another by any political bond–pockets of social calamity.

There will not be any miracle among the nation’s cities. There is no one to feed the 5000 with just a few loaves and fishes. The number of people in American society who will go hungry, both physically and in terms of their finances is inextricably growing.

The pension systems around the nation, both those created by large American companies and those created for state and municipal workers class=”mceItemHidden”> were supposed to be the ultimate in benefits programs. They were funded by large and well-financed entities. The actuarial calculations made certain that the capital would be available as people retired or had medical needs. The capital in the funds was to be invested conservatively so that any trouble in the markets would have a minimum effect. Even the bright people at Harvard and Yale lost over 25% of their endowments over the last year. And, they are supposed to be the smart ones.

The news that politicians want to keep from voters because they want to be re-elected is that many, many Americans will not only lose their jobs or have family members who will lose their jobs. They will also get sick or retire without the money that was supposed to be available, would certainly be available to them, because they had worked so long and probably so well. It is un-American to say that a problem cannot be solved, that there is nothing that can be done about something, but the chances that states and cities can regain their footing enough to insure the future of their workers and retirees is as near to zero as anything can be.

Douglas A. McIntyre