More Detroits Are On the Way

The city of Detroit is very bankrupt.  It's public pension is only going to pay cents on the dollar and the once glistening factories of the auto manufacturers are ghost towns.

Many of the problems Detroit had were YEARS in the making...but they kept kicking the can down the road and used "creative accounting" methods to pretend that there wasn't a problem.

How many more cities may soon end up in the same boat as Detroit?

And if enough cities fall....might the entire USA be heading the same way?

The crisis has many elements but a few stand out. First, contributions to employee pension funds are often well below the levels needed to ensure the payment of the benefits that are contractually or constitutionally guaranteed, let alone those that past trustees and legislatures added on a discretionary basis. Sometimes the contributions are not made at all for years at a time. Everyone with a role in determining these contribution levels has an incentive to keep them as low as possible. Politicians don't like to raise taxes to meet future obligations, while public unions would rather take the long-term risk of underfunding rather than face immediate layoffs or benefit reductions.

The largest single expenditure in most state budgets is for Medicaid. Unfortunately, health-care costs have been rising faster than either inflation or state and local tax revenues, and most economists believe they will rise even faster in the next few years.

But the most critical piece of the states' fiscal dilemma is that they are borrowing to cover their operating deficits. They do this directly—by issuing debt securities—but also indirectly. Some states, like New York, make contributions to their pension systems in promissory notes rather than cash. States and cities also sell assets and treat the proceeds as operating revenues, in effect selling off the family silver to stay afloat.

In 2009 Arizona sold its capitol buildings for more than $700 million. In 2008 Chicago leased its parking meters for 75 years for nearly $1.2 billion. In 1991 New York sold Attica Prison for $200 million to itself through a bond issuance, providing a temporary revenue boost but costing taxpayers far more in the long run in interest. While state constitutions contain various balanced-budget clauses, they generally don't define revenues or prevent such creative accounting.

The consequences of our state and municipal fiscal crises are plain: We are drastically underinvesting in physical infrastructure—roads, bridges, ports, etc.—the necessary underpinning of future growth. Just as important, we are also underinvesting in human infrastructure, most notably our children's ability to compete. No one is satisfied with the output of our educational system, yet states spent over half a billion dollars less on prekindergarten education last year than they had the year before.

No one seriously argues that when credit markets won't allow more state or local government borrowing, Washington should write checks to get them through their crises. Even if an administration proposed such a Band-Aid, it would be politically impossible for Congress to approve it. Yet if the number of cities and states in extreme distress were to grow significantly, the political pressure to do something would increase inexorably. The ultimate cost would be staggering.

It is time for the federal government to take the steps needed to avoid the social and financial crisis that must be expected if nothing changes. Washington now provides almost 30% of what the states spend annually and already imposes many mandates on states and localities in return for its largess. The federal government could condition its continued financial support on states and local governments adopting budget systems that would require recurring expenses to be matched by current revenues.

The political difficulty involved in such a step will be far less than the pain that will result if states and localities are not forced to move toward a responsible system of accrual budgeting. One thing is clear: Continuing to use cash budgeting practices that allow states and cities to inflate revenues, defer costs and multiply the burdens on future generations is the worst option.

Here;  http://online.wsj.com/news/articles/SB10001424052702304101504579546263639995456?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304101504579546263639995456.html

Well, that sounds rather serious and ominous.  We have U.S. cities and states cooking the books and doing things like selling their capital buildings just to make the balance sheet look good for a month or two.

And did you catch this sentence?;  No one seriously argues that when credit markets won't allow more state or local government borrowing, Washington should write checks to get them through their crises.

"Ummm....question from the back row...yes, I'm just an idiot from Buffalo...but what happens when credit markets won't allow cities to borrow anymore...and then Washington has no more checks available to seem them through their crisis...because Washington is hopelessly broke?"

Yes...who in the world WOULD be standing on the sidelines waiting to bail out America?

Would all the kings horses and all the kings men be able to put the US humpty back together again?

Friends I hope all of you are giving some thought to hoping for the best...but planning for the worst.