The state that was willing to incur the cost of ramping-up immigration arrests to make up for a perceived laxity in federal border enforcement also faces a significant state operating deficit – a plague that impacts dozens of states facing declining property, sales and income tax revenues. One of Arizona’s new savings initiatives – in state supported contributions to the federally mandated Medicaid program (for those with low income) – is their significant reversal (effective October 1st) of supporting the cost of transplants: “low-income patients in Arizona have been refused such necessary procedures after lawmakers cut funding for the agency, known as the Arizona Health Care Cost Containment System, or AHCCCS.” CBSnew.com (Nov. 17th).
The cost-cutting legislation was a battle between Arizona Republicans wanting to repeal “Obamacare” (also citing lower post-transplant survival statistics) and Democrats who maintained that denying such transplants was effectively a death panel decision by the state: “‘We made it very clear at the time of the vote that this was a death sentence,’ said State Senator Leah Landrum Taylor, a Democrat. ‘This is not a luxury item. We’re not talking about cosmetic surgery.’” Indeed, this restriction on transplants even applies to the very survivable Hepatitis C liver transplants. Untreated Hepatitis C is almost always fatal. Arizona transplant patients on Medicaid are trying to find private donations to support the costly surgery… or simply wrapping up their lives, preparing for the looming inevitable.
But the reality is that while the federal government – with instrumentalities like the Federal Reserve and the ability to pass deficit legislation and simply raise the nation debt (which does have strong inflation risks) – is structurally suited to deficit financing, state governments are not. They are forced to borrow in the open markets, and as their financial condition worsen, their credit ratings fall and the cost of borrowing rises. That Arizona chose to implement cuts over a political issue may be misguided, nevertheless, money for state operations is evaporating fast. As the fed cuts its spending wherever it can, the federal “rescue” that many states felt was inevitable appears to be a lifeline that is increasingly out of reach for state and local governments. And while there are bankruptcy and insolvency statutes and procedures for municipalities, no such legal structures exist for entire states.
The December 4th NY Times explains: “While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years…Municipal bankruptcies or defaults have been extremely rare — no state has defaulted since the Great Depression, an d only a handful of cities have declared bankruptcy or are considering doing so.
There are obvious liabilities in current State operations, arenas where “furlough” days and lay-offs begin to become horrifically necessary. But there are huge whales of deficit issues hidden (but very real) in accounting methods: “Much of the debt of states and cities is hidden, since it is off the books, just as the amount of mortgage-related debt turned out to be underestimated. States and municipalities often understate their pension liabilities, in part by using accounting methods that would not be allowed in the private sector. Joshua D. Rauh, an associate professor of finance at Northwestern University, and Robert Novy-Marx, an assistant professor of finance at the University of Rochester, calculated that the true unfunded liability for state and local pension plans is roughly $3.5 trillion.” NY Times. Add another $530 billion in healthcare benefits to retirees, according to the Government Accountability Office, and the problem magnifies. There are at least $2.8 trillion in state and municipal bonds floating out there, and while states have in the past covered defaults in bonds at the local level, they may no longer have that ability going forward.
Some governments are using a “sale-leaseback” structure – where government buildings are sold to private investors and then leased back to the state on a long term basis. The resulting additional de facto interest costs built into the leasing costs will cost taxpayers significantly more over the long term than if the state had simply kept the buildings. “Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.” NY Times.
Education budgets are being slashed, tuition in state colleges and universities is skyrocketing beyond any semblance of affordability, even fire houses are being closed, essential services are being curtailed, libraries and parks are shutting down, preventative maintenance is being deferred or abandoned; it’s a mess. A couple of defaults by the largest debt-ridden states, California, Illinois, Michigan and New York, could drag the economy down to an even lower level than we have seen to date. That many in Congress believed that the fed can cut deficits without addressing the underlying issues of many impaired states seems to rise to a level of unconscionable folly or the bliss of ignorance, one that will only cost the taxpayers of the future a vastly greater sum. The issue, my friends, is the totality of these United States.
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