50 States, 50 Budget Nightmares

It never ceases to amaze me as to just how all-encompassing the financial meltdown is.  Virtually all of Europe is clinging on by a financial thread.  China is wrestling with a property bubble and the slowdown in the economies of its export partners.  The United States is running a $1.5 trillion budget deficit.  The cracks in the financial dam don't stop there.  They extend to all 50 states, and nearly all cities and counties.

The easy places to trim spending have been exhausted long ago, forcing states to resort to very non-traditional measures such as selling ads on automobile licence plates, taxing sugary soda and borrowing from pensions.  Education was previously thought to be untouchable, but is now being gone after aggressively, including mass layoffs of teachers, administration support and vital school programs.

Of the 50 states, only Vermont, must balance its budget annually. The combination of cuts, tax hikes and accounting tricks have become familiar in state legislatures as the one-two punch of recession and housing downturn have dramatically reduced tax revenue for several years now.

For 2009 to 2012, states have faced nearly $300 billion in budget deficits, according to figures from the National Association of State Budget Officers. 

Last year, politically heated budget fights forced 9 states to miss their deadlines and begin the fiscal year without an agreement.  According to the National Conference of State Legislatures, 28 states have agreed to budgets this year and 16 had passed biennial budgets last year.  Eight states, including California, have extended their sessions or held special meetings to negotiate budgets.

New York, whose fiscal year began on April 1, is the only state yet to have missed passing a budget on time. California, which had to resort to paying its bills with IOUs during last year, is expected to miss this week’s deadline.

The budget problems continue way down to the city level.  Los Angeles is thought to be in danger of default and has resorted to closing city services several days per month.  Los Angeles Unified School District has endured extremely steep cuts to bring the budget in balance.  The desperation to balance the budget has led the city to use the Department Of Water And Power surplus to cover itself.

Most troubling to local governments is the combination of declining property taxes from the bursting of the real estate bubble combined with lower taxes from increased unemployment.  In fact, the unemployment is a double-whammy since this triggers more spending for unemployment and other mandated programs.

Only 15 of the 49 largest cities in the U.S. saw year-over-year declines in their unemployment rates in May, according to new Labor Department data, while the unadjusted national rate, at 9.3%, was 0.2 percentage points above its year-ago level.

Across the country, jobless rates were higher in May than a year earlier in 222 of the 372 metropolitan areas, lower in 141 areas, and unchanged in 9.  The Labor Department doesn’t seasonally adjust its data on city-level unemployment, making month-to-month comparisons difficult.  Adjusted for seasonal factors, the U.S. unemployment rate was 9.7% in May.

Unfortunately, the situation has turned into the most troublesome vicious cycle.  The more local governments are forced to cut back drastically, the more that the unemployment situation worsens, the more that pressure is maintained on home prices and the more that revenues to coffers are constrained.  Then, more budget cuts, more unemployment...

Marko's Take