States: Can’t Stop the Bleeding

Wednesday, May 19, 2010
By Paul Martin

The death of a thousand cuts has arrived. The stimulus money is running out.

By Robert Morley

Budgets that cannot be balanced. Hidden debts. Poisonous derivative agreements. Union extortionists. Millions of retired public employees still spending money like their pensions are safe.

This is the situation facing America. And be assured: The pain is only starting.

As bad as the tax increases and the cuts to public spending have been, they are nothing compared to what is coming. At least that is the conclusion of one of the New York Times’s few realist reporters.

State debt woes are growing too big to camouflage, warns Mary Williams Walsh, and states are getting desperate.

Hawaii has instituted a four-day school week. New Hampshire got caught trying to appropriate $110 million from its medical malpractice insurance pool. Colorado is trying similar shenanigans. If Rhode Island were a country, it would be worse off than many troubled European states.

Things are so bad in Connecticut that the state tried to issue new accounting rules. Think that might scare off some investors? Can’t balance the books, so just make new ones.

In California, conditions are verging on the ridiculous again. In April, personal income tax month, revenues collapsed by nearly 30 percent—making previous budget predictions look comical. Somehow officials will need to find another $3 billion this year—just to get back to the estimated $20 billion shortfall. Once businesses fully report, the tax shortfall will likely grow.

According to estimates, California will be facing a $55 billion deficit through the end of fiscal year 2010-2011, despite the hotly contested measures taken during last year’s budget wrangling. In other words, despite all the cuts, one year later, California’s deficit may be drastically worse.

Where is the money going to come from?

To give you an idea of how bad California’s plight is: Voters will soon get a chance to vote on whether to decriminalize marijuana usage. The proposal is being billed as a cure for the state’s debt problems: Just legalize it and all California’s financial problems will seem like a faraway dream. The drug would be taxed like cigarettes and could potentially provide billions in state revenue.

Three years ago, a George Mason University’s School of Public Policy study valued the American marijuana trade at an astounding $113 billion annually. Proponents of legalizing pot claim that governments are losing $42 billion a year by not legalizing and taxing the drug. As America’s foremost pot-smoking state, California’s share would be hefty. Plus, with California’s ideal climate, the state could even become the country’s agricultural-marijuana heartland.

On May 6, when House Speaker Nancy Pelosi of California was asked whether she supported sealing the border against the influx of illegal drugs from Mexico, she retorted that it was far cheaper to treat teens for drug use. The Justice Department reports that one in five U.S. teenagers used drugs last year.

Three days earlier, when California representatives went to Washington to plead for more federal money to fix the state’s budget deficit, they met with a delegation including Ms. Pelosi. In January, Pelosi publicly opposed sending federal aid because of the precedent it would set for other states.

When 48 out of 50 state governments are operating in the red, surely it is a sign that something is dangerously wrong with the country. Yet, government analysts have the gall to say that America is supposedly in the midst of a recovery!

Cumulatively, states report a total revenue shortfall of almost $200 billion. But even this massive number underreports the scale of the problem because it does not include all the money that union-corrupted politicians have promised pensioners and future pensioners. In a report cited by the New York Times, state retirement obligations are a whopping $5.17 trillion, while states have set aside less than $2 trillion.

But here is why budget problems are going to get even worse.

President Obama’s stimulus money is beginning to run out. According to cnn, if you think states have made deep spending cuts, “You ain’t seen nothing yet.”

Stimulus funds helped plug up to 40 percent of budget shortfalls over the past two years. But the Recovery Act money will only be sufficient to cover 20 percent or less of deficits this coming fiscal year, and by 2012, it will be almost entirely gone.

And all the easy fat has been trimmed. Each cut going forward is going to be progressively more painful.

For example, many states have used up the federal money mandated for education. cnn estimates that 275,000 education jobs could be slashed this coming school year. Most of the health care money is gone too.

New York City is bracing for 11,000 job cuts as it attempts to plug just a $1.3 billion gap (partially the result of state funding reductions). If this ratio of job cuts to deficit reduction occurs across the country, states will have to eliminate 1.6 million jobs to balance their $200 billion shortfall. What will that do for the national employment numbers? And that is just for next year’s shortfall.

America is currently in the midst of a deep recession that is going to cut to the bone. The full effects have only been Band-Aided over by debt. All levels of government have been borrowing like crazy to plug the gaps. The borrowed money has only provided temporary relief.

The bills are coming due. Expect more taxes—and one more cut and layoff after another—until you are numb to the pain.

Don’t believe the hype. The economy will not soon recover. If anything, use this time to reduce your standard of living and get your finances in order. •

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