More Problems for State Budgets; California to Rob Disability Pension Fund

Because of the financial crisis and the desperate financial situation many states are in many, 30 states have collectively borrowed more than $40 billion from the federal government just to keep unemployment insurance checks in the mail. A provision in the stimulus bill made those loans interest-free for an extended grace period, reports Olga Pierce at Publica.

But the extensions have run out.

More from Pierce:
Efforts to include an extension of the grace period in Obama's tax cut extension enacted at the end of last year failed, and the first batch of 14 states will have to start paying interest before the end of this year. Given that state budgets need to be hammered out in advance, that means state legislatures will soon face tough choices as they come back in session.

The amounts due range from California and Michigan, which each face payments of more than $300 million dollars, to Kansas, which will owe about $6 million. (Fun fact: Thats $2 for every Kansan.) And because of federal rules, states cant use unemployment insurance taxes to make interest payments, which means cash-strapped states will have to take that money from their general budgets, so there will be less money for roads, schools and other priorities.




Because of a historical compromise, each state operates its own unemployment insurance fund with wide latitude to set tax rates and benefits. While some states were careful to save up and build a cushion of reserves in good years, others got themselves into this mess by maintaining dangerously low levels of reserves for years before the Great Recession hit. (How is your state doing? Check out our Unemployment Insurance Tracker.)

The bill is coming due at a particularly bad time for state legislatures, which already face an $82 billion shortfall for 2012, said Arturo Perez, a fiscal analyst for the National Conference of State Legislatures...To make matters worse, most states with trust funds in the red are still bleeding--borrowing more from the federal government to pay out benefits even as they are hit with interest payments.

California is borrowing millions of dollars a day, said Loree Levy, a spokesperson for California's workforce agency...Some creative solutions are on the table. Texas, which still has reasonably good credit, plans to sell bonds. California, which at this point would probably not be approved for a Sears card, will borrow money from a creditor that cant say no: Gov. Jerry Brown's plan would dip into the states disability pension fund.

Bottom line: 1.You are absolutely out of your mind if you own any municipal bonds right now. 2.If you win a state lottery (although it makes no sense to play it), take the money up front in a lump sum.

Let states declare bankruptcy

Financial reorganization allowing the breaking of union contracts may be the best way out for someJanuary 31, 2011|By Jeb Bush and Newt Gingrich

http://articles.baltimoresun.com/2011-01-31/news/bs-ed-state-bankruptcy-20110131_1_municipal-bankruptcy-bankruptcy-option-new-bankruptcy-law


During the 2008 financial crisis, the federal government reacted in a frantic, ad hoc fashion, tapping taxpayers for bailouts galore, running roughshod over the rights of bondholders and catching the American people unaware and unprepared. In contrast, we still have time to prepare for the looming crisis threatening to engulf California, Illinois, New York and other state governments.

The new Congress has the opportunity to prepare a fair, orderly, predictable and lawful approach to help struggling state governments address their financial challenges without resorting to wasteful bailouts. This approach begins with a new chapter in the federal Bankruptcy Code that provides for voluntary bankruptcy by states, a proven option already available to all cities and towns across America.

The figures for next year's budgets are staggering. California, which faces a $25.4 billion budget shortfall, will pay $100,000-plus pensions to more than 12,000 state and municipal retirees this year. A Stanford study puts the state's unfunded pension obligations at more than half a trillion dollars. Illinois has a $15 billion budget deficit, prompting its governor and lame-duck legislature to hike its personal income tax rate by 66 percent. New York, where 73 percent of the government work force is unionized, is staring at a $10 billion deficit.


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