Let me explain.
Aside from tax revenues evaporating, the biggest problem at the state and local level is skyrocketing costs, primarily from overambitious promises made to public workers -- firefighters, policemen, teachers just to name a few -- for their pensions.
A recent article in The New York Times highlighted a study by Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, that showed that the 50 states have over $5 trillion in pension obligations.
But here's the kicker -- the states only have about $2 trillion set aside to pay for these obligations, leaving a gap of about $3 trillion.
$3 trillion -- that's pretty bad ... no, let me take that back, that's HORRIFIC.
To put that into perspective, the EU forced Greece to adopt draconian cuts because it had exceeded the EU limit of 60% for its debt-to-GDP ratio.
Under that standard, as you can see on the chart below, Rhode Island and Alaska already exceed that, with New Mexico, Ohio, Mississippi and Illinois not too far behind.
Where do you think they are going to get that $3 trillion from? A booming economy? Another tech revolution?
Hardly.
It's going to come from tax increases and spending cuts, something you are already seeing all across the nation.
Or it's going to come from financial trickery and downright fraud; just consider a few examples as cited by The New York Times of the financial gymnastics that states are doing to balance their budgets:
- New Hampshire was recently ordered by its State Supreme Court to return $110 million that it took from a medical malpractice insurance pool...
- Colorado tried, so far unsuccessfully, to grab a $500 million surplus from its state workers' compensation fund that was privatized in 2002...
- California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15...
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