*****State Budget Crisis: The Day of Reckoning*****

Since 2008, I have written a bunch of entries on the state budget crisis. Below are a few of my entries on the subject.

'State of New Jersey Is Insolvent'
State Budget Troubles Worsen
As Unemployment Soars, Some States on Brink of Insolvency
Governors ask Uncle Sam for $1 trillion
U.S. states start printing their own currencies
*****California Leads Nation to Bond Default Abyss*****
California About To Start Issuing IOUs
*****California's Rapid Descent Into The Abyss*****

Well, as 60 Minutes put it last month, the day of reckoning is at hand. The video below is a much watch to understand how bad things are.

State Budgets: The Day of Reckoning - 60 Minutes - CBS News

Finally, the New York Times this week reports that a state bankruptcy option is being sought, quietly.

January 20, 2011
Path Is Sought for States to Escape Debt Burdens

Policy makers are working behind the scenes TO COME UP WITH A WAY TO LET STATES DECLARE BANKRUPTCY and get out from under crushing debts, including the pensions they have promised to retired public workers.

Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.

But proponents say
some states are so burdened that THE ONLY FEASIBLE WAY OUT MAY BE BANKRUPTCY, giving Illinois, for example, the opportunity to do what General Motors did with the federal government's aid.

Beyond their short-term budget gaps,
some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.

Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state's bonds could suffer, possibly ending up at the back of the line as unsecured creditors.

"All of a sudden, there's a whole new risk factor," said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission's Office of Municipal Securities during the Clinton administration.

For now,
the fear of destabilizing the municipal bond market with the words "state bankruptcy" has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.

"They are readying a massive assault on us," said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. "We're taking this very seriously."

Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.

My reaction: The two key points to take away from this:

1) State budget crisis is entering its final stage (with bankruptcy imminent).

2) The 60 minutes video and the NYT article are based on an optimistic economic outlook (effects of food crisis not factored in). The reality will be worse.

Conclusion: 2011 is going to be bad

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One Response to *****State Budget Crisis: The Day of Reckoning*****

  1. Mark says:

    Not sure whether the government will come to the rescue? I bet they will. And they gave a reason: the banks. While the east and middle east will appreciate their currencies, the US and the EU will inflate their currencies to support their banks. And they can do so: their populations pay much less for food. And it could thereby re-balance the food equation somewhat.

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