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From CNN's Fortune blog:
More bets against cash-strapped states - Street Sweep: Fortune's Wall Street Blog
In contrast to Illinois' fiscal situation, the federal deficit amounts to just over 40% of the federal budget. Hence, on a budgetary basis, Illinois' deficits are more than 20% higher than the federal ones. Unlike Portugal, which has an opportunity to take advantage of an EU fund aimed at helping its highly-indebted members buy time to restore their finances, no such framework is available to the states.
Overall, the blog entry highlights the challenging situation confronting the nation's states. It also shatters notions that the states were more prudent fiscally than the federal government. Instead, they developed rigid spending structures that were fiscal time bombs. Those time bombs were then triggered by the sharp drop in tax revenue brought about by the recent severe recession.
IMO, rather than resorting to the business-as-usual fiscal gimmickry of claiming that they are "balancing budgets," as had been the case for years before the housing bubble/financial crisis/severe recession, the affected states would do far better to develop a truly credible plan to achieve a balanced budget within 3 years, moderate and persistent surpluses afterward to build a well-financed "rainy day fund," accompanied by mechanisms and other controls that would assure that the practices that led to the current fiscal vulnerability could not be repeated.
I fully recognize that many would argue that the states are "constitutionally" required to balance their budgets. However, what satisfies that definition is not a genuine balanced budget but typically a balanced operating budget. There is significant latitude for non-budget maneuvers that add debt. That's exactly the kind of gimmickry that destroys fiscal credibility. For example, even in New Jersey where Governor Christie has made some courageous choices, "balance" is achieved by suspending funding of the State's pension plan. Yet, unless the plan's contingent liabilities are reduced (very controversial), the reality is that today's "balance" is merely achieved at the expense of larger deficits tomorrow. In sum, I believe a fiscally credible strategy toward a balanced budget over a reasonable timeframe is far more important and would be far more constructive than a "smoke-and-mirrors" assertion of a balanced budget that falls apart once one looks more closely at the details. To be sure, such a move would require political courage. But it would also be far more honest than the illusions of balancing budgets that prevailed in the past and helped lay the groundwork for the states' dire fiscal situation today.
In addition, states should eliminate the backdoor mechanism of voter-approved bond referenda that was widely used to add debt i.e., bond issues for highway construction, prison expansion, mass transit, etc. Instead, such matters should be treated as ordinary legislative appropriations and subject to regular review vis-a-vis the states' other fiscal needs. Under such referenda, voters who were typically not privy to the state's larger fiscal picture or not inclined to pursue rigorous due diligence, almost always approved what seemed to be good projects. Yet, absent the crucial context of the states' overall financial situation, the decisions were ill-informed, even reckless, and they added to the states' debt burdens (something that should not be occurring were the budgets truly balanced, as they most certainly were not). At the same time, state legislatures and governors avoided accountability from this sleight-of-hand delegation to relatively uninformed voters and the absence of regular legislative review reduced oversight opportunities.
...traders are betting that two big U.S. states, California and Illinois, are just as apt to default on their bonds as Portugal -- and almost as likely as Iraq.
The price to insure against a default on Illinois general obligation bonds jumped to an all-time high Thursday. The state, which is facing a deficit that amounts to half its annual budget, has had its rating downgraded by both Moody's and Fitch.
More bets against cash-strapped states - Street Sweep: Fortune's Wall Street Blog
In contrast to Illinois' fiscal situation, the federal deficit amounts to just over 40% of the federal budget. Hence, on a budgetary basis, Illinois' deficits are more than 20% higher than the federal ones. Unlike Portugal, which has an opportunity to take advantage of an EU fund aimed at helping its highly-indebted members buy time to restore their finances, no such framework is available to the states.
Overall, the blog entry highlights the challenging situation confronting the nation's states. It also shatters notions that the states were more prudent fiscally than the federal government. Instead, they developed rigid spending structures that were fiscal time bombs. Those time bombs were then triggered by the sharp drop in tax revenue brought about by the recent severe recession.
IMO, rather than resorting to the business-as-usual fiscal gimmickry of claiming that they are "balancing budgets," as had been the case for years before the housing bubble/financial crisis/severe recession, the affected states would do far better to develop a truly credible plan to achieve a balanced budget within 3 years, moderate and persistent surpluses afterward to build a well-financed "rainy day fund," accompanied by mechanisms and other controls that would assure that the practices that led to the current fiscal vulnerability could not be repeated.
I fully recognize that many would argue that the states are "constitutionally" required to balance their budgets. However, what satisfies that definition is not a genuine balanced budget but typically a balanced operating budget. There is significant latitude for non-budget maneuvers that add debt. That's exactly the kind of gimmickry that destroys fiscal credibility. For example, even in New Jersey where Governor Christie has made some courageous choices, "balance" is achieved by suspending funding of the State's pension plan. Yet, unless the plan's contingent liabilities are reduced (very controversial), the reality is that today's "balance" is merely achieved at the expense of larger deficits tomorrow. In sum, I believe a fiscally credible strategy toward a balanced budget over a reasonable timeframe is far more important and would be far more constructive than a "smoke-and-mirrors" assertion of a balanced budget that falls apart once one looks more closely at the details. To be sure, such a move would require political courage. But it would also be far more honest than the illusions of balancing budgets that prevailed in the past and helped lay the groundwork for the states' dire fiscal situation today.
In addition, states should eliminate the backdoor mechanism of voter-approved bond referenda that was widely used to add debt i.e., bond issues for highway construction, prison expansion, mass transit, etc. Instead, such matters should be treated as ordinary legislative appropriations and subject to regular review vis-a-vis the states' other fiscal needs. Under such referenda, voters who were typically not privy to the state's larger fiscal picture or not inclined to pursue rigorous due diligence, almost always approved what seemed to be good projects. Yet, absent the crucial context of the states' overall financial situation, the decisions were ill-informed, even reckless, and they added to the states' debt burdens (something that should not be occurring were the budgets truly balanced, as they most certainly were not). At the same time, state legislatures and governors avoided accountability from this sleight-of-hand delegation to relatively uninformed voters and the absence of regular legislative review reduced oversight opportunities.
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