State Budget Crisis: Deadbeat States Need to Stop Spending, Start Mending

State governments are broke, and things are going to get worse before they get better - a whole lot worse.

Look at California. It's facing a $19 billion budget deficit next year and had to raise tuition in the state university system by 32% to try and collect revenue.

Arizona sold off its state capitol, state Supreme Court building and legislative chambers to a group of investors that is now leasing them back.

And take Illinois, which spends twice as much as it collects in taxes and is six months behind on a stack of bills totaling $5 billion. Illinois state employees - including state troopers needing to gas up their patrol cars - are finding some places won't honor their state credit cards. And legislators are getting evicted from offices because the Illinois government failed to pay the rent.

Little wonder the "Prairie State" now has a new nickname: the "Deadbeat State."

The aggregate budget deficit of the 50 U.S. states is in the tens of billions of dollars. Collectively, they owe $1 trillion in pension payments. And come spring, the $160 billion federal stimulus spigot will be turned off - yanking out the financial IV that kept many states running during the recession.

These problems could lead to the loss of one million state and local government jobs, could create a roadblock to the U.S. economic recovery, and could force another federal stimulus package that the federal budget can't afford.

In the expose "State Budgets: The Day of Reckoning" that aired Dec. 19, the CBS News 60 Minutes program turned the spotlight on the looming state-budgetary meltdown. Financial analyst Meredith Whitney, who predicted the U.S. banking collapse and the crisis that followed, has now directed her financial-soothsaying skills at the states.

She's spent the last two years studying this crisis, and doesn't like what she sees.

"Next to housing, this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," Whitney told correspondent Steve Kroft.

New Jersey Gov. Chris Christie, who has been busy cutting projects, jobs and benefits to make up his state's $10 billion budget deficit, agreed with Whitney, and told CBS' Kroft that "the day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's coming.'"

Whitney said one of the worst things about the state budget crisis is how unaware everyone still is of the issue's severity.

"The most alarming thing about the state issue is the level of complacency," said Whitney. "The lack of transparency with the state disclosure is the worst I have ever seen."

Twenty-six new state governors will take office in 2011. Most are looking at budget cuts and tax increases - moves that were previously viewed as politically impossible. But the reality is that even-more-draconian measures will be necessary if states are to weather this storm.

These choices include deeper cuts in education spending, pension payments and benefits for state employees.

"We now have to get to the business of climbing out of the hole. We've been digging it for a decade or more. We've gotta climb now, and a climb is harder," said New Jersey Gov. Christie.

This prompted last week's Money Morning "Question of the Week:" What's the cure for deadbeat U.S. states? Do states need to raise taxes, cut programs, lay off workers, and/or slash benefits? How have you been affected by your states' poor financial condition? How concerned are you about the severity of our U.S. state budget crisis?

Here is a collection of reader responses highlighting concern over the condition of deadbeat states.

No More WallowingLike all of you, I am extremely concerned about the fiscal crisis in state governments, and counties and cities aren't far behind. We've overspent - wildly - for too long. States must try to do all the stated measures and more. Not only must the size of government diminish and some programs disappear, but states should begin liquidating land holdings. I mean state parks, resource areas, etc. in order to abate this crisis.

As a retiree of the U.S. Forest Service, I do not like the idea of my retirement check being cut in half because we cannot find a solution, because we became such a liberal, socialistic nation that the government could not deny free-bee giveaways to illegal aliens, outside governments, and wildly extremist foreign policies at a time when we are flat broke. I know that the value of publicly owned lands is substantial, and the potential for their liquidation is great. The Bureau of Land Management has recently been disposing of lower quality lands, but not to a level visible to the public. Such is the nature of politics.

If the U.S. budget crisis continues and is finally recognized as the nation-threatening crisis that it really is, there are at least 191 million acres of public land with billions of dollars of value in mineral, oil and gas rights, timber, recreation, and other wild land values that can be sold to pay a portion of the debt. Until now, all our politicians prefer to wallow in denial along with most Americans, but the time has come to make tough decisions.

- GB

Different States, Same Broke StoryI am on Medicaid so I am very concerned about my state's financial condition. States, like people, get into financial problems by spending more than they have in the belief things will get better and they will have more money in the future. Then they are hit by floods, hurricanes, tornados, earthquakes and ice storms. States make bad policy decisions based on what they "think" people want. The people they listen to are the
organized ones that have an agenda, not 'real' people.

Illinois went wrong when they closed the equine slaughter plant in DeKalb. They lost jobs, tax revenue and helped to destroy the entire equine industry nationwide causing untold suffering to thousands of horses that are now starving. I can't feel sorry for Illinois with their stupidity, or President Obama who voted for the closure at the request of animal rights activists.

Wisconsin was just as stupid when the governor vetoed a bill allowing the sale of raw milk. The bill passed both houses with overwhelming approval, but he listened to the likes of Dean Foods. Money talks louder than the people. The law would have helped hundreds of distressed dairy farmers to stay in business.

Then there is my local state idiot who campaigned for a four-lane freeway stretching from Kansas City to Oklahoma that runs parallel to one 20 miles to the east. It was 'supposed' to bring industry to the area. We lost a large factory and its jobs the year it was completed. But, it runs conveniently close to his house. Many of my neighbors work in KC and would benefit from a mass transit train.

Virtually every state would be better off to empty several jails of non-violent (drug) prisoners. Those laws definitely need revision! But that won't happen as long as the political establishments are getting their cut.

So, every state is different, but they all (legislators) have made their mistakes and need to get smarter and less on the take for themselves.

- Doris K.

Government Employee Costs Hurting StatesThe issue of cost for the state is not property taxes; they don't pay them. The issue is not raising taxes because the taxpayers who have money will move which will make matters worse.

The issue is expenditure and one major cost is employees. The main problem here is the unions. This is the same thing that sunk GM.

One simple way to cut costs is to outsource things like garbage collection, ambulance service, park maintenance and so on.

Another way is to take on the unions. They will have to control pension costs; use a 401k program just like the private sector. They will have to control health costs for employees. They to have self funding and perhaps cut back on Cadillac policies.

In my opinion, health care should be priced similar to auto insurance; that is, if you have DUI's on your record you should pay more. If you are an overweight coach potato smoker why should you get the same rate as an exercising, non-smoking health conscious person?

Another issue is deadbeat or entitlement costs. Our little town has an answer, which is a police car ride across the bridge. Another answer would be to lower entitlements and God forbid they would move to a more generous state.

Guess what: If they all moved to California I might chip in with bus ticket.

- Don W.

Health and welfare benefits must be changed to reflect what private industry has done: more employee contribution and larger deductibles and co-pays.

States certainly cannot continue to provide early retiree health benefits as they have been doing for years. There are many cities and states that provide the full cost of retiree benefits for as many retirees as active employees. This is not sustainable - private companies would be out of business.

- T.N.

Every job with the state should not take five or more employees to do. Eliminate those who are trying to get out of work and keep those who are working. It's always obvious who those are who are willing to work.

- Marilyn M.

[Editor's Note: Thanks to all who responded to last week's "Question of the Week" regarding U.S. deadbeat states.

Be sure to answer next week's question: What are your 2011 investing strategies? Are you changing your strategies in the New Year? What market sectors or investment vehicles do you think will do the best and worst?

Send your answers to mailbag@moneymappress.com.!

Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at mailbag@moneymappress.com. Make sure to reference "question of the week suggestion" in the subject line. We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate - via e-mail or by posting their comments directly on the Money Morning Web site.]