EconomyWatch

From the July 2010 Trumpet Print Edition

States: Can’t Stop the Bleeding

Across America, states are being forced to slash spending. Government debt woes are growing too big to camouflage, 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. Things are so bad in Connecticut that the state tried to issue new accounting rules. If Rhode Island were a country, it would be verging on Greece.

California looks like it is trying to become Greece. 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. 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: The drug would be taxed like cigarettes and could potentially provide billions in state revenue.

Forty-eight out of 50 state governments are operating in the red—a sure sign something is dangerously wrong. Yet government analysts have the gall to say that America is supposedly in the midst of a recovery!

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

President Barack Obama’s stimulus money is beginning to run out. 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.

The bills are coming due. Expect more taxes—and one more cut and layoff after another—until the pain is numbing.

America’s Housing Crash Double Dip

If you think home prices have hit bottom and are now headed back up for good, think again. According to Lender Processing Services, as of the end of March over 9 percent of outstanding mortgages in America are delinquent. Add in homes that are in some stage of foreclosure, and the rate for non-current mortgages rises to an astounding 12.4 percent—that is one in eight mortgages.

As bad as these numbers are, they are actually a slight improvement over February’s figures. However, the improvement may prove temporary and will have little effect on falling house prices.

Meanwhile, a more immediate cause of depreciating home sale prices is intensifying.

In April, banks repossessed 92,432 properties—a new record and up 45 percent from a year earlier. These houses will soon hit the listings. And bank-owned properties typically sell for steep discounts.

According to Mike Whitney, writing for the Market Oracle, “banks have been withholding supply to keep prices artificially high” (April 18). During the banking panic in 2008 and 2009, banks did not want to foreclose on homes because it would have pushed prices lower, and that would have affected the value of banks’ mortgage-backed security bonds—causing the banks more trouble at a time when many big banks were collapsing. The government also wanted to stop foreclosures for political reasons, so a moratorium on foreclosures was adopted.

That moratorium ended on March 31. “So,” noted Whitney, “the dumping of backlog homes has begun.”

And the house dumping could turn into an economic downpour. In the run-up to peak housing in 2007, upward of 40 percent of all job creation within the U.S. economy was related to the housing market (builders, suppliers, real-estate agents, brokers, bankers, etc.). Those jobs are now gone, and unless housing prices not only stop falling but start rising, the jobs won’t be coming back.

Looming Pension Crisis

One of the world’s largest pension funds has issued a wake-up call for the world. Politicians have overpromised and financial planners have under-delivered. The money that many retirees are counting on for retirement just isn’t there. Social disorder is on the way.

On May 18, California’s Public Employees Retirement System pension fund (Calpers) asked the state for a massive $600 million bailout—the tiniest tip of the iceberg.

According to fund officials, the development is driven largely by huge investment losses, but also because people are living longer and retiring earlier than their models anticipated.

Last year alone, the fund lost $55.2 billion, or a quarter of its value. According to Alan Milligan, interim chief actuary, “There’s more to come” as the fund reports on more recent performance.

Although this is not much consolation, Calpers is not alone. A study released in April by Stanford University found that public pension funds across California are underfunded by as much as a half trillion dollars—more than the state’s entire yearly budget.

If accurate, California may soon be officially bankrupt. And California isn’t the only state. Some estimates say states have underfunded pension funds by a collective $3 trillion.

David Crane, an economic adviser to California’s governor and former California public employee pension plan board member, said the state’s pension funds have been underreporting the gap between revenue and obligations for years.

The consequences are clear: California needs a lot more money, or it must offer a lot fewer benefits and services.

California is a case study in the failure of democracy. Politicians are great at promising benefits and programs, but notoriously loath to pay for them through tax increases.

Expect the budget debacles to continue.