States And Cities Will Beg For Funds

It is old news that states and municipalities face deficits not only in their budgets but also in their pensions. The pension issue could become a crisis in a few years as these funds begin to default on their obligations. The annual budget problem is more acute. At least half of the states, and perhaps as many as three-quarters of them, will run budget deficits in the fiscal year that began a week ago. These states are faced with draconian budget cuts or raising taxes.

The problem has gotten so bad in the areas most desperate for money that people in Detroit are mowing the lawns of public parks because the city cannot afford to.The FT reports that “You will see investor concern about the viability of those cities and therefore you will see, inevitably, further spread widening in the municipal bond market”, said Robert Parker, senior adviser at Credit Suisse Securities. He specifically singled out Michigan, Illinois, and California.

Most states cannot go into bankruptcy, at least according to their own laws, but several could become insolvent. These face the same problem as Greece. Borrowing costs become so high that covering debt service becomes an increasing part of their expenses. States and cities have no recourse other than to beg the federal government for money or close down essential services like road repair and police, which would begin to create some amount of anarchy even if only on the smallest scale.

There has been concern for some time that states such as California and cash-strapped cities including Detroit will not be able to cover their obligations. A year or two ago this problem was nearly unimaginable. It is more than imaginable now. Citizens in Detroit may have to do more than mow park lawns. They may have to patrol the streets that police used to cover.

Douglas A. McIntyre