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December 20, 2010

60 Minutes: State and Especially Municipal Debt Is a Ticking Timebomb That Will Explode In The Next Year
Update: Still More on This, From Reason

"The next twelve months" is the prognosis offered by one analyst here, quoted as dependable by 60 Minutes' Steve Krofft.

For those who like Christie, you get a quadruple dose here, as he is quoted numerous times and every time is presented as offering the real take on spending/debt.

Monty's been emailing me a lot about this problem. Unfunded liabilities to state and municipal pensions are over a trillion dollars -- promises unbacked by any real coin -- and both states and municipalities rely on issuing debt to fund their increasingly unsustainable spending. They're approaching junk status now on that front, and will soon approach "joke," so very soon the market is going to impose some extremely serious austerity measures on these bodies, as they simply will no longer be able to borrow at all.

Obama's failed state of Illinois is particularly highlighted here, as a well-known deadbeat state where even State Troopers can't use their state-issued credit cards to fill up their tanks -- gas stations won't accept them, as they know the state is simply not good for its debts.

This is a problem in which the government bears most of the responsibility, but also the government-employees unions, and also, notably, the public, which was supposed to be keeping an eye on their elected representatives, but didn't.

The problem (as I can guess) is that every year the state and muni employees demand more money in one form or another, whether straight salary, improved benefits, or contributions to pensions, or all three.

The only way to do this is to increase taxes, so that we reduce everyone else's net salary (salary after taxes) to increase government employees' salaries.

Obviously, the public won't go for that, so bargains are struck so that in the future there will be greater contributions to pensions and such. The employee unions get what they want, they think -- more money -- but this additional payment flies past the public because it's a hidden tax. It's a future tax, an inevitable one, but hidden because no one is paying it right now.

In 15 or 20 years, yeah. But right now? No. So this is used as a way to dodge public disapproval of the basic idea that everyone should have less so that government employees may have more.

The public employees unions should have known this, and known that if they wanted to take from others to give to themselves, they should have presented the issue squarely and straight-up, so that the public could approve it for real, rather than being tricked into it by Future Math and Inevitable Taxes.

The government bears primary responsibility here, especially all those Democrats relying on the public employee unions for donations and get out the vote troops, as they've passed stealth future tax after stealth future tax on the public, never actually securing the consent of the governed for this arrangement.

But the public bears a great deal of responsibility too -- they let this happen. A democracy only works if the electorate is engaged and vigilant, and the American public hasn't been, for decades. Maybe a century. By telling ourselves "oh we'll work out the details later" or "I'm sure we'll figure a way to do this in the future," we've created a problem that we won't be solving, and the hour of reckoning is almost at hand.

People have got to stop telling themselves that it's not "nice" to refuse salary increases and huge pension plans for government workers -- the public does in fact stand in the shoes of The Boss in these situations, and like any Boss, the public has to bear in mind that pleasing everyone isn't always possible or desirable, and could in fact lead to bankruptcy.

It's everyone's fault, but the public isn't going to pay huge new taxes so that someone else can have a nice pension while they have little or none at all. The public employees are going to have to take a massive haircut, and they bear as much blame as anyone: If they really thought it was a great idea to lower everyone else's salaries to increase their own, they should have followed the proper democratic method for doing so, and put it to an honest vote, with the public adequately appraised as precisely what the game was.

By the way: Media Matters and AFSCME are pretty sure that CBS is now officially a right-wing hate site or something.


More: JackStraw sends this Reason piece with the greeting:

I hate to be the bringer of bad tidings but this is going to happen, not a matter of if, just when.

It sounds like Illinois is going to be the first to collapse but when California goes it's going to be epic.

Obama definitely contributed to this mess. One of his early acts was to subsidize bonds to make them more attractive -- when they should have been less attractive, as they were more risky.

Consider what happened in 2008. Government revenues started to fall, signaling to investors that bonds might be riskier than they thought. At the same time, several insurers that typically backed municipal bonds went bankrupt or exited the market, meaning that buyers were left unprotected against the risk of default. Instead of seeing this downturn as an incentive for states and cities to change their behavior, Washington stepped in with a new municipal offering.

The Build America Bonds program, part of the American Recovery and Reinvestment Act of 2009, was aimed at subsidizing bonds for infrastructure projects. Under this program, the Treasury Department pays 35 percent of bond interest to the issuing government. If a state or local government issued a bond at a high rate to make it appealing to investors—10 percent, say—the Treasury would make a 3.5 percent direct payment to the issuer. In exchange, the federal government gets to tax the returns on the bonds. It’s no surprise that, starting in 2008, states and cities increased their debt dramatically, while investors enabled this overspending.

Investors = you and me, to the tune of 35% of the subsidy on these bonds.

The parallels with the housing bubble are worrisome. Prior to the meltdown, mortgages were perceived as very low-risk investments. Banks were encouraged through government policies to lend large amounts to people, whether they could afford it or not, and borrowers were encouraged to spend more than they should. Both lenders and borrowers had faith that nothing would go wrong—and that if anything did go wrong, Washington would save the day.

But Washington has no money, either, and the public is laudably now pushing back on bailouts and ever-increasing obligations (which are just disguised future taxes).


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