The New York Times points out that some states like California and Illinois are at risk of default, and that a default could spread to other states:
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.
Some of the same people who warned of the looming subprime crisis two years ago are ringing alarm bells again. Their message: Not just small towns or dying Rust Belt cities, but also large states like Illinois and California are increasingly at risk.
The finances of some state and local governments are so distressed that some analysts say they are reminded of the run-up to the subprime mortgage meltdown or of the debt crisis hitting nations in Europe.
Analysts fear that at some point — no one knows when — investors could balk at lending to the weakest states, setting off a crisis that could spread to the stronger ones, much as the turmoil in Europe has spread from country to country.
Next year is unlikely to bring better news. States and cities typically face their biggest deficits after recessions officially end, as rainy-day funds are depleted and easy measures are exhausted.
Douglas Borthwick of Faros Trading writes:
The most important thing missing from the tax extension was the expected extension of the Build America Bond program.
The Build America Bond program has been the municipal market’s saviour over the past 18 months.
We are concerned that no one is looking at the growing problems in New York, California and Illinois, three states that comprise 25% of the US GDP. The expiration of the Build America Bond program could prove to be a terrible price for the US to pay and we expect squabbles in the US Congress regarding the bailing out of States in 2011 that could easily rival that which we have witnessed from the European Union over Ireland and Greece.
Reuters’ columnist James Pethokoukis claims that the failure to extend the Build America Bonds program is an intentional plan by the GOP to bankrupt states such as California and Illinois, as a way to weaken unions:
Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.
That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program. BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31. And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”
In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.
Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy.
From the Republican perspective, the fiscal crisis on the state level provides a golden opportunity to defund a key Democratic interest group. For the GOP, it’s an economic and political win.
And see this.
My friends on the right hate unions.
My friends on the left love unions.
But I hope that people on both sides of the aisle can agree that intentionally bankrupting any state is as stupid as cutting of one’s nose to spite one’s face.
There is no United States without the states. And the unintended consequences intentionally driving a state into bankruptcy would be enormous.