Friday, February 19, 2010

Snowstorms

The last several weeks living in North Georgia have made me long for the warm weather of New Smyrna. Snow has fallen across the mountains and into the Mid-Atlantic States. Mentioned in the news, but not garnering huge attention, has been the concern over budget shortfalls to handle snow removal and storm effects. The next economic storm brewing is more significant than this winter’s snowstorms though, it is the budget shortfalls at city, county, and state levels. Unlike the Federal government the other levels of government cannot run deficit budgets, leaving IOUs, payment vouchers, and possible insolvency as their only options.

Currently, California’s state budget is $40 billion, and assumes $9.6 billion in revenue will come from the Federal government, although it is rumored unlikely. Watching the news, the “Governator” remains firm on passing budgets, leaving programs intact, and not raising taxes. Sadly, Arnold has been at the front of the line grabbing monies for his state, in sharp contrast to what most Republican governors tend to do. Along with California; Illinois, Arizona, Florida, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are also on the verge of fiscal disaster. Each of these states shares in common an increase in spending to fund public pension plans and support social programs that outpaced revenues. Coupled with the economic downturn, and housing crisis, revenues have fallen sharply. States like Arizona and Florida saw legislators enjoy spending due to property tax growth and found themselves like giddy children with an unlimited budget in a toy store full of opportunity.

Compounding the state problems are unfunded pension liabilities. Teachers, firefighters, policemen, and other public service employees enjoy an opportunity that allows productive members of society to work a limited number of years and then retire. In California the projected teacher pension shortfall is currently $43 billion, a huge number that can only be made up through taxes, additional contributions, or reduced benefits.

At the municipal level, foreclosures have created property tax deficits and reduced spending has cut sales tax revenues. Adding to revenue problems, and wiping out reserves, is increased expense for snowstorms, ice storms, and potential hurricanes this summer. “USA Today” ran an article on February 3rd, 2010 examining road maintenance under the caption, “Tight times put gravel on the road.” The article noted gravel roads are emerging as a sign of financial struggle in rural towns. In this case, budgets are so constrained that regular maintenance can no longer be performed on asphalt roads, something we all take for granted. Additionally, we have seen the fantastic examples of bridge failures, and can expect more infrastructure failures of roads, sewer, and water.

Listening to a podcast during the last week the discussion turned to the economy and the participants talked about local insolvencies, and mortgage resets, making an observation, “if it were really that bad wouldn’t someone tell us?” In hindsight, no warnings were given leading to the housing bust, or the market crash in March 2009. Looking back further, the headlines of the 1930’s are hilarious with weekly pontifications of better times coming and I believe our economic recovery is going to echo a similar path. I realize that comment contradicts the optimistic news presented daily. However too many factors remain: unemployment, reduced tax revenues, drains on local spending, excessive quantitative easing, Chinese currency manipulation, and increased spending. It seems like Americans have become the proverbial frog in a pot of hot water, slowly being boiled to death, oblivious to the impending doom.

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