Four states are teetering on the edge of failure. These four
states make up over 25% of the United States'
and are home to over 25% of its population. Their tax revenues have
plummeted, and they can no longer afford the spending programs
politicians have approved over the past years, even decades.
Technically, there's no legal process by which states can
declare bankruptcy. When our country's bankruptcy code was
formed, apparently the concept was unthinkable.
So states just muddle on, borrowing more and more to pay their
debts (isn't that technically a
?) while politicians split along party lines so that no one has to
ever be held responsible for the dreaded tax hikes or spending
cuts. Everything can just sputter along…until it can't.
If a state can't pay its bills or make good on its debts, you
don't need a bankruptcy judge to tell you there's a big problem.
Even if it can't be declared "bankrupt," common sense tells you
that it's broke, insolvent...failed.
Yesterday, California Governor Arnold Schwarzenegger declared a
fiscal state of emergency to force lawmakers to pass a state budget
more than one month overdue. The state, which is the 8th-largest
in the world, faces a $19 billion
. They resorted to paying bills with I.O.U.s last year, and it
looks like they're not afraid to do it again.
If things got bad enough, and California just stopped making debt
payments, it's likely the world's financial system would get swept
up in the inevitable chaos. But no one in the
community is ready to concede that there's a possibility the state
would default. At least not yet.
The unspoken hope is that Washington D.C. would swoop in at the
last moment to bail out both debtor and creditor. But the tide may
be shifting. Washington may be distancing itself from this implicit
Illinois Governor Pat Quinn recently said that during his trip to
Washington for the National Governors Association meeting it was
made clear to all governors present that they should be fully
prepared for less money to come from the federal government than
they were hoping for.
And if that's the case, you don't want to be anywhere near
these 3 other ticking time bombs:
-- By now it's pretty much common knowledge Illinois is broke. And
if its politicians aren't all corrupt, they're at least spineless.
Because the state government refused to either raise taxes or cut
spending, Illinois simply stopped paying the roughly $4.7 billion
in bills it owes to public schools, rehabilitation centers, child
care providers, the University of Illinois and other unsecured
creditors as of the beginning of July.
The University of Illinois has been stiffed on 45% of its state
appropriation this year. Legislators helpfully suggested that the
university borrow the money and wait for the state to pay them
Lawmakers also decided to just "stick a pin" in $3.7 billion worth
of unfunded pension payments until after November elections.
Apparently there's no need for incumbents to take a stand on where
they think the $3.7 billion should come from. Borrow it at rates so
high that interest payments will add an additional $1 billion to
the bill? Or just take it out of the general fund and give the
middle finger to every non-pensioned citizen who relies on public
schools and state-sponsored social services?
-- Before the Senate adjourned for its summer vacation, it did
manage to put together a spending plan. Unfortunately, it failed to
come up with the funds to pay for it. The end result is a $9.2
billion deficit and projections that the country's third-largest
state by population could run out of cash by September.
This week, Governor David Paterson called an extraordinary
legislative session for New York senators, imploring them to return
from their summer vacations to pass a budget that's already 4 weeks
Nine senators, 5 democrats and 4 republicans, didn't bother showing
up, so when it became apparent the majority democrats didn't have
the 32 votes need to pass the final bill needed to finish the state
budget, Patterson had no choice but to end the emergency session.
Regardless, E.J. McMahon, director of the Empire Center for New
York State Policy, says, "The state's 2010-2011 budget, like its
deficit-ridden predecessor, shapes up as a flimsy house of cards
that could begin to collapse before the year is out."
-- Still reeling from the loss of tax revenues generated by the
, GM and Chrysler, Michigan's lawmakers have been crossing their
fingers that the U.S. Congress will cough up $560 million in
additional federal money to help them fill their budget
deficit. In 2008, Congress passed a bill that made higher
Medicaid payments to states especially hard hit by the Great
Recession, states just like Michigan.
Unfortunately, it looks like the federal legislation that would
have extended payment through 2011 will die before reaching the
floor of the U.S. Senate.
Without the $560 million in federal money, Michigan faces ugly cuts
to programs covered by its general fund - including universities,
health care and tax revenue-sharing payments made to local
governments. And if a budget is not approved by October 1, the
state faces a total shut down of governmental operations.
These states have the most pressing problems, but there will be
plenty of others that will feel the pain from the Great Recession
for years to come. See where your state stands -- check out our
States In Crisis: Where Is Your State on the