Congress vs. the United STATES of America

There are 39 states with net budgetary deficits (30 in fairly deep negative territory), and the prospect for resuming their prior level of taxes is beyond slim. Between falling property values and foreclosures, the property tax base is eroded. With spending not remotely what it was in 2007 and even given the reduced levels of driving, sales and fuel taxes are way down. And the unemployment numbers tell you all you need to know about income taxes, state and federal. The federal government has mandated programs that are significantly funded by the states, and certain federal actions (or lack thereof) – like border enforcement – place additional burdens, particularly on states that border Mexico. Arizona has provided one, probably unconstitutional response, but there is a clear signal that American states are facing longer-term financial issues – perhaps even insolvency (or bankruptcy) – that actually threaten the future of America itself. Under-funded or even unfunded state defined benefit retirement plans (especially those with cost of living escalators), combined with early retirement options, will probably be the "steel-bearing pipe that looks like a straw" that will in all likelihood crush the camel's back.

Social safety nets and public education are being hit hard. Declining educational standards auger very badly for our future as a functioning and competitive nation. But recent primary results have alerted the incumbent members of Congress that there is a move afoot to kill representatives who continue to support more spending and, naturally, a continued expansion of an already-intolerable national deficit. States that had counted on federal support to balance their budgets – money considered a "sure thing" – are beginning to realize that Congress is backing off helping the states. And while that might get a few folks elected to Congress, the ultimate cost to America may be billions or even trillions of additional dollars as municipal services begin to collapse, state and local pension obligations go unpaid. States cannot "print money" (increase the money supply, what economists call "M-1"); they have to issue bonds or borrow in the commercial marketplace to the extent their tax base plus federal grants do not cover the cost of operations.

The extreme example of the potential impact of a state failure is California, and if the largest state in the union fails, the consequences for the rest of the nation would be devastating. Yet Congress is backing off of a $2 billion commitment to California (and making the same noises vis-à-vis other states expect similar help, especially with the state Medicaid supplement that was part of the federal stimulus package), which puts a very nasty pressure on the state and may actually trigger a financial failure that is not contemplated in our federal bankruptcy law (Chapter 9 – municipal bankruptcy – does not rise to the level of an entire state). We may have a failure that is simply unprecedented, but think of cities and towns filing under Chapter 9 and the state itself failing without any legal guidance as to what that means to creditors, pension-holders and state employees. And if it doesn't happen immediately, the push might generate the unintended result in a year or two, as this financial malaise lingers. Cutting federal aid to states anywhere puts pressure on state budgets everywhere. Without any doubt, the collapse of California would end any vectors toward an overall improved U.S. economy and potentially trigger a full-on depression instead.

The Los Angeles Times (June 3^rd) addresses the specifics in California: " 'This is a serious problem,' said Jean Ross, executive director of the California Budget Project, a Sacramento-based nonprofit. 'The fear of deficits seems to be overtaking Washington. They are not realizing the bigger threat is the economy could slide back into recession as a result of state and local budget cuts.'… In California, the governor has already proposed eliminating the state's welfare program, canceling state-subsidized day care for hundreds of thousands of low-income children, freezing school spending and making a number of other deep cuts to close a $19.1-billion budget gap… Failure to get the federal money would surely force more drastic proposals. But even if the state eliminated its entire home healthcare program, which serves 440,000 elderly and disabled Californians, it wouldn't make up for the $1.9 billion the state is now scrambling to secure… The states have launched a frantic lobbying effort to persuade the U.S. Senate to provide the assistance… 'You've got virtually every governor in the country calling on Congress to do this,' said H.D. Palmer, deputy director of the California Department of Finance. 'This is not just a California issue. It is a national issue.'"

Indeed, 42 governors have written Congress begging for an extension, but deaf ears apparently still abound. "A report issued [June 3^rd] by the National Governors Association and the National Association of State Budget Officers projected that state revenues would 'remain sluggish' for two more years. State general fund spending declined by nearly $75 billion, or 11 percent, from 2008 to 2010, according to the report. But states, which unlike the federal government must balance their budgets, avoided even harsher cuts because of nearly $135 billion in stimulus grants from Washington… The aid included $87 billion made available by adjusting how states and the federal government share the growing cost of Medicaid, the health insurance program for the poor and the disabled. The economic downturn is expected to drive up enrollment in the program by 21 percent from 2009 to 2011, according to the report… Although the federal Medicaid share varies by state, the stimulus act raised it to an average of 66 percent, from 57 percent, according to the Kaiser Family Foundation… The reimbursement increase was limited to a 27-month period that ends on Dec. 31." New York Times (June 8^th). 46 states have fiscal years that begin July 1^st.

Yup, we might be seeing some incumbents that may have been Tea-Party'd out of office retaining their jobs, but they may preside over the greatest financial catastrophe the U.S. has ever faced. Forget about the collapse of the commercial real estate market or the problems of failing economies in Europe. California is the eighth largest economy on earth! Only the U.S., Japan, China, Germany, France, England and Italy are bigger. Add a few more states to the list, and… Wake up!

I'm PeterDekom, and isn't it interesting that the California state symbol is a bear?!