13 October 2008

America's latest export: empty municipal coffers

James Doran reports from New York on how all 50 state treasuries are failing to raise the billions needed just to keep functioning and pay the wages
James Doran
The Observer, Sunday October 12 2008

The Golden State needs $7bn in the short term just to pay wages of civil servants and maintain infrastructure

Financial Armageddon, the meltdown, the crisis, or whichever title fits the bill this week, is about to enter another even more damaging phase in America.

And it would pay for the rest of the world to take notice because a fair amount of evidence has piled up in recent months to prove the adage about America sneezing and everyone else catching a cold.

The housing markets of much of Europe mimicked those in America by slumping after a few years of heady price increases. The credit markets of Europe and Asia seized up, again following America's lead. Then, of course, stock markets in London, continental Europe and the Far East lost trillions of dollars of value in the wake of several historic Wall Street plunges last week.

Even the solutions to these dominoing financial calamities were tried first in America. The big bail-out authored by US Treasury Secretary Hank Paulson and his friends in Congress, with provisions to protect hundreds of thousands of dollars in the accounts of ordinary citizens, was copied to some degree by Alistair Darling in the UK Treasury and his counterparts across much of continental Europe.

So what's next? What could possibly come along in the middle of this series of economic nightmares to make things even worse? How about a total depletion of local government finances that pay for the things that make up the very fabric of American society. Imagine that rippling across the rest of the world, reducing public services to skeleton operations.

Arnold Schwarzenegger, the former Terminator star turned governor of California, wrote a rather troubling letter to Paulson a couple of weeks ago warning him that the Golden State is in need of about $7bn to meet short-term spending needs.

The money is raised in the bond market to pay the wages of police officers, teachers, judges, attorneys, the National Guard and every other civil servant you can think of. It is also used to pay for the general upkeep of the state - the roads, bridges, tunnels and the essential infrastructure.

California State Treasurer Bill Lockyer is trying to raise a bond issue to help meet the payment, but it is proving very difficult with the debt markets being locked up as they are. And time is running out. Schwarzenegger needs to raise the money before the end of this month or thousands of policemen, teachers and other civil servants will not be paid, prompting who knows what kind of industrial action and civil unrest.

'What is most disconcerting about the way this turmoil is panning out,' says Sujit Canagaretna, senior fiscal analyst at the Council of State Governments (CSG), 'is that most state governments were already in a terrible state. But now things have worsened considerably and the credit markets have a real choke hold on almost all state treasuries. It is so bad that economic activity in most states has all but ground to a halt.'

States have become accustomed to borrowing their way out of troubles like these, but today state and local governments are having just as hard a time securing credit as the banks and financial firms .

'It is just like Wall Street,' Canagaretna says. 'It is almost as if they thought they could borrow for ever without ever confronting the consequences.'

In 1998 the 50 United States had just under $200bn of net tax-supported debt. By 2007, that figure had almost doubled to $398bn, according to the CSG, while tax revenues had fallen sharply. 'Increasing taxes is politically unpalatable and cutting costs is difficult, but borrowing more and more was easy,' Canagaretna adds.

Every day another state or city reports a fresh problem raising funds in the bond market. For the week ending 26 September 2008, some $6bn in new municipal debt issues were expected, yet only $100m came to the market.

Two weeks ago, Erie County, New York could not complete a $75m bond issue because of the unavailability of investors, jeopardising the county's entire $12m payroll. Last week, the state of Massachusetts went into the market for its routine $400m to be used for quarterly payments to cities and towns but the bond issue came up $170m short. Meanwhile, Missouri is having trouble raising a bond to pay for essential road and bridge repairs.

The only bright spot is in Kentucky, where the state treasury successfully completed a $400m bond issue last week. 'But the combined effects of all the problem states far overshadow this one success story,' Canagaretna says.

The financial problems of state governments stretch far beyond the bond market. New York State differs slightly from California and other states in that it cannot call upon the bond markets for short-term funding. Rather, the Empire State relies upon large cash reserves derived from its once bulging tax coffers.

New York State has about $8bn of cash to meet its essential costs, but is in the midst of a budget crisis. Tax revenues for the next year are set to fall by about a third because of the troubles on Wall Street. The problem is that the financial services industry accounts for about 20 per cent of all taxes levied in the State of New York.

'Things are very problematic,' says a spokesman for New York State Comptroller Thomas DiNapoli. 'And, like Governor [David] Paterson said the other day, 49 other states are dealing with the same problems. There is a lot of concern.'

As the spectre of a long and painful recession looms ever larger across the globe, it is troubling to note that these dual problems facing governments across America - falling tax revenue and reduced access to debt - are universal. Brace yourselves for another great American export.

No comments: