According to many mainstream experts, analyst Meredith Whitney's call for a municipal bond apocalypse is dead wrong, and the fears which have knocked that market hard since August are overblown, overdone, and an overreaction. Maybe. But when I read reports like those that follow, which detail an increasingly sorry outlook for municipal finances, as well as the fact that legislators in Washington are weighing legislation that will allow states to go bankrupt, I can't help but think that we've heard such reassurances before (remember "contained'?).
State tax revenues continued to strengthen at the end of 2010, but even with that improvement the long-term outlook for most states "is still ominous," the Rockefeller Institute of Government said in a report released on Tuesday.
"State fiscal recovery will be exceptionally slow and much longer compared to the prior recessions," said the group, which tracks states' finances and economies.
Record revenue declines during the recession, increasing demands for more spending, and unemployment rates that remain nearly double their pre-recession levels mean that full economic recovery for many states will take several years, according to the New York-based group.
The institute's preliminary figures for the final three months of 2010 show that tax collections were up 6.9 percent compared to a year earlier.
"Year Ahead Looms as Toughest Yet for State Budgets" (Associated Press)
If 2011 is hinting at a national recovery, there is little sign of it in statehouses across the country.
States that already have raided their reserve funds, relied on borrowing or accounting gimmicks, and imposed deep cuts on schools, parks and public transit systems no longer can protect key services in the face of another round of multibillion dollar deficits.
As governors roll out their budget proposals and legislatures convene this month, they do so amid a sputtering economic recovery and predictions of slow growth for years to come. State and local governments face lackluster revenue projections, worries from Wall Street over looming debt and the end of federal stimulus spending.
In the first weeks of 2011, Republican and Democratic governors alike have begun detailing across-the-board pain for education, health care, transportation, public safety and other programs. Some say the year of reckoning for state and local governments is at hand, with calls for structural changes that could radically shift expectations of what services government provides.
Many believe the months ahead will be the most challenging in memory, with consequences for millions who depend on government funding.
"Pensions Add to US States’ Leverage" (Financial Times)
Connecticut, Illinois and Hawaii are among the states with the highest combined debt and pension liabilities, according to a study to be released on Thursday by Moody’s Investors Service.
In a bid to give a broader picture of state finances, Moody’s combined their net tax supported debt and unfunded pension liabilities to assess how leveraged states are.
“These costs are serious and they are growing,” said Robert Kurtter, managing director of the state and local government finance group at Moody’s. “If they are addressed [by the states] they are manageable.”
Moody’s research comes amid concern about the strain that pensions will place on US states, which have faced severe budget deficits since the economic recession.
Republican lawmakers are studying ways for states to go bankrupt, a move that could enable them to renegotiate their pensions, but one that will be met with fierce opposition in Congress and the financial markets.
"States Grapple with Medicaid Woes" (ModernHealthcare.com)
Year after year of state budget deficits, the economy's halting recovery from a severe recession, and the end in June to billions of dollars in extra federal funding for Medicaid have left states wrangling over how to reduce spending on the safety-net insurer in the coming year.
States face the “most difficult budget year on record” in the coming fiscal year that begins in nearly every state on July 1, the Center on Budget and Policy Priorities says in its latest survey of deficits. Lawmakers across 44 states and the District of Columbia face a total projected shortfall of $125 billion in 2012.
The newly released results estimate that federal recession relief to states since 2009 totaled $135 billion to $140 billion and plugged up to 40% of state deficits through 2011. Increased federal funding for Medicaid, which Congress reluctantly extended once, accounted for a significant share of the relief. That Medicaid relief ends in June.
"U.S. Bills States $1.3 Billion in Interest Amid Tight Budgets" (New York Times)
As if states did not have enough on their plates getting their shaky finances in order, a new bill is coming due — from the federal government, which will charge them $1.3 billion in interest this fall on the billions they have borrowed from Washington to pay unemployment benefits during the downturn.
The interest cost, which has been looming in plain sight without attracting much attention, represents only a sliver of the huge deficits most states will have to grapple with this year But it comes as states are already cutting services, laying off employees and raising taxes. And it heralds a larger reckoning that many states will have to face before long: what to do about the $41 billion they have borrowed from the federal government to help them pay benefits to millions of unemployed people, a debt that federal officials say could rise to $80 billion.
The states, when they borrowed the money, hoped that the economy would have turned around by the time the first interest payments came due, or that future Congresses might loosen the terms. But the economy did not turn around in time and the new Congress, dominated by Republicans determined to shrink the size of government, shows little appetite for deepening the federal deficit by bailing out the states.
The problem is not only the staggering number of people who have lost their jobs, but the fact that many states entered the downturn with too little money salted away in the trust funds they use to pay unemployment benefits, which they are supposed to build up in good times by taxing employers.
"Illinois Not Alone in Fiscal Problems; All But 10 States Face Budget Deficits" (McClatchy Newspapers)
State legislators in Illinois had to fill a budget hole equal to half of the state's total spending. Part of their solution last week: Raise income taxes from 3 percent to 5 percent.
California legislators can empathize as they consider deep spending cuts, tax increases and a reorganization of state government to try to close a $25.4 billion budget gap.
All but 10 states face budget deficits this coming fiscal year. How legislators around the country balance their books could guide California officials in the difficult task ahead.
At the same time, the rest of the country is waiting to see how California, the country's biggest and wealthiest state, tackles its budget crisis, said Scott Pattison, executive director of the National Association of State Budget Officers.