The Next Crisis?

I hate to be alarmist, but the prospects of a crisis in state and local finance seems almost inevitable. "Creative" efforts to avoid taxing to cover current expenditures have created a looming debt crisis. And politics seems to militate against any efforts to deal with the crisis. As this New York Times article reports:

The State of Illinois is still paying off billions in bills that it got from schools and social service providers last year. Arizona recentlystopped paying for certain organ transplants for people in its Medicaidprogram. States are releasing prisoners early, more to cut expenses than to reward good behavior. And in Newark, the city laid off 13 percent of its police officers last week. While next year could be even worse, there are bigger, longer-term risks, financial analysts say. Their fear is that even when the economy recovers, the shortfalls will not disappear, because many state and local governments have so much debt — several trillion dollars’ worth, with much of it off the books and largely hidden from view — that it could overwhelm them in the next few years.

This is another instance of placing the burden of current expenditure on future taxpayers. But the states and localities have less leeway to continue borrowing, and the federal government seems unlikely to bail them out.

Consider:

Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.

or:

Arizona, hobbled by the bursting housing bubble, turned to a real estate deal for relief, essentially selling off several state buildings — including the tower where the governor has her office — for a $735 million upfront payment. But leasing back the buildings over the next 20 years will ultimately cost taxpayers an extra $400 million in interest.

and then the most transparent kicking of the can:

New York balanced its budget this year by shortchanging its pension fund. And in New Jersey, Gov. Chris Christiedeferred paying the $3.1 billion that was due to the pension funds this year.

It is these growing hidden debts that make many analysts nervous. States and municipalities currently have around $2.8 trillion worth of outstanding bonds, but that number is dwarfed by the debts that many are carrying off their books.

The problem is not so much the magnitude -- the economy will recover -- but the structural problems of our politics. There is no political gain to dealing with current problems.