I.O.U.

It appears that the majority of the states (39 it seems), absent enough help from the Federal government, are going to have deficits in the immediate future. The February 7^th Los Angeles Times puts a number to the problem: “For fiscal year 2010, they will be forced to close a $84.3-billion hole, according to the National Conference of State Legislatures. The total shortfall through fiscal 2011 is estimated at $350 billion, according to the Center on Budget and Policy Priorities, a nonpartisan think tank in Washington.”

And right now, getting enough federal help is not lookin’ too good. The version of the American Recovery and Reinvestment Plan (the big new bailout bill) hammered out by the Senate on January 6^th (still evolving), which will soon to be sent back to the House of Representatives, seems to have reduced direct aid to the states contained in the original House bill from the $79 billion (which wasn’t as much as states had wanted) to $39 billion.

With formal lending markets frozen mirroring equally bitterly cold winter frost that has enveloped all but the traditionally warmest part of the U.S., states are resorting to delaying payments or even to issuing IOUs to their vendors and creditors. New bond issues and flat out borrowing from traditional financial institutions just aren’t available even to state governments.

States do have a borrowing mechanism from the Federal government for their unemployment insurance benefits, and help is on the way, if the new bailout bill passes, for Medicare and education, but when you get right down to it, a lot of states and municipalities are just plain running out of options. Unlike the Federal government, which can either issue debt (like Treasury bonds) or simply dilute the value of the dollar by increasing the money supply (some call that “printing money,” but it sure tanks the value of the dollar), states either have to balance their budgets (raise taxes and cut spending – two alternatives that can only accelerate job loss and make this economy even worse), delay or default in their payments or borrow if they can find a willing lender.

The problem is there are no real willing lenders, so state with budget issues have resorted to creating “unwilling lenders.” California is a hardship case – the legislators cannot reach agreement among themselves how to deal with this crisis (the California Constitution requires a 2/3 majority to pass a budget, a profoundly unrealistic provision) – with huge deficits from past years (resulting in a heavy debt load), and this state has resorted to forcing its own residents and suppliers to bear the immediate brunt of a failed state governmental economy.

The January 31^st Los Angeles Times: “[California] State Controller John Chiang's decision to conserve cash by withholding nearly $2 billion in tax refunds [to 2.7 million taxpayers], among other scheduled payments, starting Sunday means thousands of people and businesses that rely on state money will not be paid as usual…With Chiang delaying for at least 30 days a total of $3.5 billion in state payments, county welfare agencies and universities are scrambling to make up the difference. They're trying to avoid interruption of tuition grants for students, child care for poor families, services for the disabled and treatment for Californians with mental health and drug abuse problems.”

In 1994, California’s Orange County declared bankruptcy under a section of the Federal bankruptcy law, Chapter 9, which applies only to a municipality ("political subdivision or public agency or instrumentality of a state"), meaning that for states to access this rarely used provision (fewer than 500 filings in the 60 years that this provision has existed), they have to address their failings, not in total state-wide bankruptcy, but by taking their agencies into Chapter 9 piece by piece.

Unlike other forms of bankruptcy, Chapter 9 creditors don’t get to come in and liquidate the assets of the bankrupt municipality in auctions and fire sales. Those assets stay. But a trustee can be appointed, the contracts between the bankrupt entity and its creditors (including collective bargaining agreements with its unions) can be set aside, and the debts reduced or eliminated. Belt-tightening then becomes a forced issue… a very unpleasant reality for those affected. Subsequent borrowing costs thereafter and dealings with suppliers and unions can become very strained.

As we step into the uncharted waters of this managed depression, the rules that have applied during the lifetime of virtually all living Americans will be twisted, revised, replaced and revisited. It is likely that this meltdown will change us as a people, alter our way of life, expectations and the way we are governed in some of the most significant ways we have ever faced. Predictions of when this will end and how we will “recover” seem to be rolling guestimates… the best we can do is try and support each other with kindness and understanding, embrace flexibility, and prepare for changing those sacred parts of our lives we never thought would be threatened. But we will get through this; we always do.

I’m Peter Dekom, and I approve this message.