Toast!

Whatever this economic malaise might be called – a slow recovery, a longer and lingering depression, a recession that might double dip, yucky times with slightly vaguely good news every now and again – we are not seeing a return to prosperity anytime soon. The electorate wants it both ways: low taxes and economy recovery. “Voters are frustrated both with high unemployment and high budget deficits, but the Obama administration and congressional Democrats face a catch-22: The deficit won't come down significantly until the jobless rate decreases, while most of the policies that could improve the employment situation would raise the deficit further, at least in the short run.” Washington Post (July 3^rd).

But the federal problems seem easy compared to those facing the states. After all, only the feds can raise the money supply (OK, it’s kinda like printing money). With the exception of Montana, North Dakota, Arkansas and Alaska, every state will have budgetary shortfalls. And since every state except Vermont has a balanced-budget requirement, most states are destined to become lawbreakers. It’s hard to note this with a straight face, but with about a trillion dollars in unfunded state and municipal retirement programs – which literally have little hope of being funded without crippling the state taxpayers with impossible taxes – representing just the tip of the iceberg, there are more immediate delinquencies to attend to.

As stupid California – the poster child for states in trouble – struggles to create a sustainable budget, the Governator has mandated that state workers be paid only a $7.25 minimum wage until the mess gets sorted out by the legislature. On July 2^nd, an appellate court affirmed his power to issue that mandate, but State Controller John Chiang said the antiquated computer system couldn’t actually fulfill the order, and a trial court set the issue for a hearing in August while halting an immediate implementation: “Judge Patrick Marlette of Sacramento County Superior Court said that although Chiang was breaking state law by failing to issue the smaller paychecks, he could not discount the computer argument as ‘frivolous.’” The July 16^th Los Angeles Times. For government workers who are paid two, three or even more times that wage, this reduction (if it passes judicial review) – layered onto required furlough days – is nothing short of catastrophic. California is $19.1 billion in the hole right now.

But this disease is spreading throughout the country. On May 27^th, the Center on Budget and Policy Priorities wrote:

· Large gaps for 2011 and beyond. States’ fiscal problems will continue into the next fiscal year and likely beyond. Fiscal year 2011 gaps — both those still open and those already addressed — total $112 billion or 17 percent of budgets in 46 states. This total is likely to grow as revenues continue to deteriorate, and may well exceed $180 billion. States will also face large gaps that could total $120 billion th e following year ([fiscal year] 2012).

· Gaps in 2010 budgets. These new shortfalls are in addition to the gaps states closed in their fiscal year 2010 budgets. Counting both initial and mid-year shortfalls, 48 states have addressed or still face such shortfalls in their budgets for fiscal year 2010, totaling $200 billion or 30 percent of state budgets — the largest gaps on record.

While most folks see California as the biggest, baddest boy on the fiscal block, population-wise, that dis-honor may have to rest with Illinois. With 50% of its pension obligations unfunded, Illinois also faces an inability to pay even its current bills. The state has a $12 billion deficit, and the legislature has yet to figure out how to pay for 26% of the state’s going-forward budget as well. The July 3^rd New York Times breaks it “down and dirty”: “Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

“He picks the papers off his desk and points to a figure in red: $5.01 billion… ‘This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,’ he says in his downtown office… Mr. Hynes shakes his head… ‘This is not some esoteric budget issue; we are not paying bills for absolutely essential services,’ he says. ‘That is obscene… Only the most delusional people think you can solve this without raising taxes.’ … The legislature has a different instinct: to borrow. In good times, that leads to unsightly imbalances. In bad times, it becomes catastrophic. This year, leaders gave the governor authority to move money around and left town to campaign.” In both Illinois and California, municipalities are feeling the “trickle down push to bankruptcy/insolvency” as well.

The potential of serial state insolvency is here now; I use the word “insolvency” because there is no provision in federal law for an entire state to file for bankruptcy. And the only solution is going to come from a federal bailout that voters are profoundly opposed to. Most of the country sees the big states, California, Illinois, New Jersey, New York, etc. as the culprits, and there is very little sentiment for “fly-over state” voters to support the arrogant “big-city” states. Reality does impose obligations on bigger population centers, particularly with inner city problems not mirrored in more sparsely populated regions. Unfortunately for those “smirking” voters, except in the four states noted above, their states just might be on the insolvency list too, even though their defaults are not as imminent. That American vote rs think that this will just “go away” without federal intervention is an invitation to greater catastrophe. Letting a problem get a whole lot worse before electing to act only makes the cost of the solution that much greater.

I’m Peter Dekom, and the only thing that might “go away” is our standard of living.