Taxpayer Unapproved State and Local Government Debt: $7.3 Trillion

Steven Malanga, senior fellow at the Manhattan Institute, says that state and local governments have $7.3 trillion of hidden debt.  These debts were not approved by taxpayers, despite the fact that most state constitutions and many city charters limit borrowing and require voter approvals.

• Illinois is rolling pension debt and state officials are being sued because they failed to disclose the debt and misrepresented it.
• Chicago city employees retiree health care annual expenses will increase by a factor of 5 in ten years.
• Each and every resident of Sacremento, CA is obligated with $4200 of debt they did not approve and the debt is 5.5 times the annual city budget.
• New Jersey legislators wanted $8.6 billion for school refurbishing projects and knew voters would not approve it.  So, they set up an independent borrowing commission for the purpose.  After spending $7 billion, the commission disbanded and left the taxpayers the debt.
• 95% of New York's $63 billion debt was never given voter authorization.

Malanga recommends that governments are forced to stop providing defined benefit pension plans.  Independent borrowing authorities must be denied and debts should only be allowed with voter approval.

The total state and local debt is mentioned twice in the article.  The first time it is mistakenly given as $7.3 billion.

Missing Jobs Increase Again in November 2010

Continuing the trend since July, the number of missing jobs in the United States increased again in November 2010.  As usual, I will present the jobs statistics using those without the seasonal adjustments from the Bureau of Labor Statistics and add in the data from the November Unemployment Report.  I calculate the number of missing jobs based upon the percentage of Americans who were or wanted to be in the workforce in January 2000, near the end of a period of several years in which that percentage had been high and fairly constant.  I do not believe that Americans are yet lazier than they were then, though the easy availability of long-term unemployment insurance might be changing Americans into more dependent people.  But the overriding assumption here is that if the economy were healthy, it would produce enough jobs of high enough quality that 67.49% of Americans would want to work now, as they did in January 2000.

The number of employed Americans fell by 334,000, while the working age population grew by 185,000 people, of whom about 67.49% or about 125,000 would be expected to want jobs.  As a consequence, the number of missing jobs grew by 459,000 in a single month.  This is approaching a half-million more missing jobs in one month.  This is another human disaster.  The real unemployment rate is 13.47%, not the commonly touted 9.8%.  Despite this, the Wall Street Journal of 4-5 December 2010 has a top front page graphic showing that 39,000 jobs were added in November.  Their number was only for the non-farm payrolls.

Despite the early elation of many small business owners that the outcome of the mid-term election would ultimately work to diminish the anti-business climate in the halls of the Federal Government, the uncertainties about next year's tax rates, the escalating awareness of the costs and overhead of ObamaCare, worries about the EPA's rulings on CO2 emissions, increased costs and paperwork coming due to the new FDA regulations just passed through the lame duck Congress, continued worries about the sustainability of the federal debt and that of many state and local governments, and fears of inflation due to the massive printing of money are among the many factors keeping businesses from hiring.  Large businesses have many of the same worries and face a world of competitors in which they will pay the highest corporate taxes in the world this next year.

CATO Grades Governors on Tax and Spending Actions

Chris Edwards of the CATO Institute has put out the 2010 report card on governors.  He grades their performance on their taxation and spending actions and policies.  These state spending results are very important because one of the major reasons for slow job growth and standard of living increases since 2000 has been the 55% increase in state and local government spending from 2000 to 2008.  State spending in 2009 and 2010 is down due to the extended recession, but local government spending was up in those years enough that combined state and local spending in 2009 equaled that in 2008 and exceeded 2008 spending levels in 2010.  State government spending increases were especially steep in the years 2005 - 2008.  Aggregate state spending in 2008 was 31.4% higher than in 2004 and 46.8% higher than in 2000.  Local government spending increases were even faster than the state increases between 2000 and 2008.  These state and local government spending increases added to the federal government increase of 52.5% between 2000 and 2007 and the increase of 66.7% between 2000 and 2008.  These combined spending increases shifted huge amounts of wealth from the private sector to the government sector and greatly weakened the American economy.

The sharp increase in oil  prices in 2007 started the worldwide recession, which brought on our mortgage and loan crisis.  The heavily funded state and local governments had spent years meddling with land use and building restrictions which had driven up the cost of housing beyond belief.  In the extreme case of California, this caused 80% of new home buyers to become sub-prime borrowers!  Such pressures on home buyers helped to fuel support for Fanny Mae, Freddy Mac, the Federal Reserve, and private lending institutions to make mortgages more readily available.  The house of cards developed by the combined effects of huge local, state, and federal spending increases, the oil price shock, and the mortgage and loan crisis created the basis for a severe recession.  Of course, Obama's socialist and anti-business response to that crisis greatly extended and delayed the recovery.

Let's return our focus to the orgy of spending by local, state, and federal government since 2000 and concentrate on state and local spending and debt.  Between 2000 and 2010, state and local government debt increased by 205%!  This debt estimate is based on official, unrealistic projections of state and local pension funds, which estimates them to be underfunded by about $1 trillion.  Better estimates see them as underfunded by about $3.2 trillion.  We have a tendency to focus more on federal spending and debt, but the problem of local and state spending and debt is also huge.  We have a general government spending and debt problem. 

The Edwards report on governors scores them on

• The average annual percentage change in per capita general fund spending proposed by the governor
• The average annual percentage change in actual per capita general fund spending
• The average dollar value of proposed, enacted, and vetoed tax changes
• Changes in the top personal income tax rate
• Changes in the top corporate income tax rate
• Changes in the general sales tax
• Changes in the cigarette tax rate

The spending on the general fund is used because governors generally have more control on that spending than on other state spending.  After all, state legislatures share in the spending, tax, and debt orgy.  The scoring is based only on the time period 2008 - 2009 since the period covered by Edward's governor report in 2008.  This is important, since Maryland Governor Martin O'Folly, err..... O'Malley earned a grade of F in the 2008 report since he urged and received a $1.4 billion tax increase in 2007, yet in this report he is at the bottom of the grade B list.  There is a paragraph in the report on each governor giving more information on their actions and policies and you should look up your governor in the report.  The paragraphs are labeled alphabetically by state.

The scores and grades are [State, Governor (Party), Score, Grade]:

South Carolina, Mark Sanford (R), 74, A
Louisiana, Bobby Jindal (R), 71, A
Minnesota, Tim Pawlenty (R), 66, A
West Virginia, Joe Manchin (D), 66, A

Wyoming, Dave Feudenthal (D), 63, B
Rhode Island, Don Carcieri (D), 62, B
Oklahoma, Brad Henry (D), 62, B
Nevada, Jim Gibbons (R), 61, B
Texas, Rick Perry (R), 61, B
Alabama, Bob Riley (R), 61, B
Montana, Brian Schweitzer (D), 61, B
Georgia, Sonny Perdue (R), 60, B
Missouri, Jay Nixon (D), 59, B
Idaho, C. L. "Butch" Otter (R), 58, B
New Mexico, Bill Richardson (D), 57, B
Vermont, Jim Douglas (R), 56, B
Indiana, Mitch Daniels (R), 56, B
Maine, John Baldacci (D), 55, B
Maryland, Martin O'Malley (D), 55, B

Kentucky, Steven Beshear (D), 54, C
Michigan, Jennifer Granholm (D), 53, C
Mississippi, Haley Barbour (R), 53, C
South Dakota, Mike Rounds (R), 53, C
Tennessee, Phil Bredesen (D), 53, C
Nebraska, Dave Heineman (R), 51, C
North Dakota, John Hoeven (R), 51, C
Hawaii, Linda Lingle (R), 51, C

Florida, Charlie Crist (R), 49, D
Ohio, Ted Strickland (D), 49, D
California, Arnold Schwarzenegger (R), 47, D
Delaware, Jack Markell (D), 47, D
Arkansas, Mike Beebe (D), 47, D
Iowa, Chet Culver (D), 47, D
Massachusetts, Deval Patrick (D), 43, D
New Hampshire, John Lynch (D), 41, D
North Carolina, Beverly Perdue (D), 40, D
Arizona, Jan Brewer (R), 40, D
Pennsylvania, Edward Rendell (D), 40, D

Washington, Chris Gregoire (D), 39, F
Wisconsin, Jim Doyle (D), 35, F
Colorado, Bill Ritter (D), 35, F
Illinois, Pat Quinn (D), 30, F
Connecticut, Jodi Rell (R), 28, F
New York, David Paterson (D), 25, F
Oregon, Ted Kulongoski (D), 19, F

The average score of the 45 state governors scored was 50.  The governors of Kansas, New Jersey, Virginia, and Utah had not been in office sufficiently long to score them.  The governor of Alaska is not scored because its budget is so peculiar that it cannot be compared to that of other states.

The average score of Republicans was 55, while that for Democrats was 47.  Yet, Gov. Manchin (D) of West Virginia was tied for the 3rd best score with an A at a score of 66, while Gov. Jodi Rell (R) of Connecticut had the third worst score of only 28 with a grade of F.  Nonetheless, the Republicans in this report's time-frame and also that of the 2008 report ( R 55 - D 46) scored significantly higher than did the Democrats.

Edwards points out that some governors think businesses are simply cash cows to be milked for higher state spending.  Prime examples are Quinn of Illinois and Kulongoski of Oregon.  Others, such as Carcieri of Rhode Island, Manchin of West Virginia, and Pawlenty of Minnesota understand that lower state taxes on businesses help state businesses to compete with those in other states and with those in other countries.  Edwards advises that corporation income taxes be abolished because they decrease jobs, create huge compliance burdens, and raise relatively little revenue.

In the last two years, nine states increased their top income tax rates:  California, Connecticut, Delaware, Hawaii, New Jersey, New York, North Carolina, Oregon, and Wisconsin.  Three states have cut their top income tax rate:  North Dakota, Rhode Island, and Vermont.  Governor Carcieri of Rhode Island was outstanding in cutting the state's top income tax rate from 9.90% to 5.99%.

We need to pay attention to the assault on our liberties due to the growth of local and state governments as well as that from our voracious federal government.  This list also gives us a scorecard for the several governors who are running for the Senate in this election or who are being discussed as potential presidential candidates in 2012.  You might note that Charlie Crist of Florida has only a grade of D.  Among governors talked about as potential presidential candidates, Bobby Jindal had an A, Tim Pawlenty had an A, Rick Perry had a B, Mitch Daniels had a B, and Haley Barbour has a C.

Howard Rich: Kicking the Can Right Off the Cliff

Howard Rich wrote an editorial at the Investor's Business Daily which rather long-windedly bemoans the spendthrift ways of politicians.  Most of us can appreciate his reasons for being upset, but we are fully capable of doing our own moaning and trashing about in pain.  But buried deep into his piece was this nice summary of some very foreboding financial figures:

According to a January 2009 paper from the National Center for Policy Analysis, the average European Union nation needs to place more than four times its current gross domestic product in the bank (earning interest) just to fund current obligations. In fact, the NCPA report found that by 2020, the average EU nation will have to raise its tax rate from 40% to 55% of the national income just to cover existing benefits.

In Japan — which has the world's highest percentage of debt to GDP — fiscal policy is "out of control," according to Harvard economist Kenneth Rogoff, who predicted the 2008 U.S. bank failures. According to the latest estimates from the International Monetary Fund, total Japanese borrowings will soar to 204.3% of the nation's economic output in 2011.

Meanwhile in America, total public debt will exceed GDP for the first time since the World War II era, part of a massive borrowing spree that has seen the nation more than double its debt over the last six years. "The U.S. is in a state of paralysis in its fiscal policy," Rogoff said last month. "When they start tightening monetary policy even a little bit, it's going to send shock waves through the system."

In addition to this brewing global and national crisis, U.S. states and municipalities are facing similar ticking time bombs. A March 2010 Northwestern University report discovered that the total unfunded liability of state government pension funds was $3.2 trillion — or more than $2.2 trillion higher than government officials estimated.

Note that last paragraph:  Government officials are claiming that state government pension fund liabilities are only 31% of what they really are.  To be that wrong, they have to be lying to the taxpayers.  That cannot be a mistake.  Of course, by now, one has to be really, really obtuse not to have come to understand that most of our politicians and bureaucrats have made it a standard practice to lie to us all of the time.  Clinton seemed to raise the commitment  to the lie to a new standard, but Obama has readily surpassed him in his commitment to lying.  Given the pitiful state of the planned economies and socialist states of Europe that Obama so much wants to transform the United States of America into, well .... you really must lie.  There is no truthful way to make those European Big Brother states palatable.

Some Objectivists tend to think that discussing mere matters of the amount of debt is not very important because it is not a matter rich in ethical content.  I disagree.  The Preamble of the Constitution noted our responsibility to our Posterity which was to be recognized by the very limited government of the Constitution. George Washington also reminded Americans that they had no right to saddle their posterity with debt.  He was very right and very wise.  Passing the debts of our governments today on to our children and our grandchildren is a heinous thing to do.  We have essentially been doing just this since the Social Security Act was passed in 1935.   The Medicare program has raised this practice to new heights.  Then came Medicaid, ObamaCare, and bailouts in TARP and now forever into the future with the Financial Industry Bailout and Consumer Spying Act which is said to likely be passed by Congress later today, and incredible subsidies to alternative energy firms who environmentalists will never allow to build any power plants.  There is no fun in spending money you actually have to earn, so the national governments prefer usually to just run the printing presses as long as need be.  Of course this drives down the value of everything the private sector does as productive work, but hardly anyone ever noticed as long as they were bribed with some goodies.  But, the number of necessary goodies kept escalating and now there is not more room for further escalating them.  The ever more meager productive private sector is now just too small in Europe, Japan, and the U.S. to support the Leviathan governments with all their redistributed goodies.

Speaking of which, Glenn Beck's 26 May 2010 show dwelt on the same Big Brother watching over the peasants bank accounts, credit card transactions, and ATM transactions that I discussed in the early morning hours of the 26th.

High-Risk Local Government and Bankruptcy

One recurring theme of my posts is that when governments expand their operations and powers beyond those needed to provide for the equal protection of our individual rights, they generally do a very poor job of providing the given service, they inevitably end up failing to protect our individual rights, and they fail very unequally in protecting our rights as well.  When governments fail, they often put all of that government's operations at risk.  This is the situation in such states as Rhode Island, New York, New Jersey, and California where terrible state debt and massive liabilities clearly exceed the level that taxation can support.  Higher taxes there will simply lead to more economic stagnation and the flight of many capable and often wealthier people from the state with lower tax revenues resulting.  After a point of government ineptitude, there is no way out but to drastically cut even the most legitimate services.

Here is another example of how a local government put its essential services at risk by trying to perform services which should have been left to the private sector.  Responsible local government has no business departing from the few legitimate services such as police protection and the courts, because other activities increase the need for involuntary taxes and also the risk of the failure of the government.  Businesses in the private sector fail more often than not and there is no reason to expect that city, county, and state governments can operate more efficiently than do private sector businesses.  Of course, however badly they operate a business, they can call upon a large tax base to subsidize the poor operation, which will commonly allow a government to avoid acknowledging that they are operating the business they have take on poorly.  This usually leads to further deterioration of the operation of the business with time, since incentives are missing to improve the operation.

The capital city of Pennsylvania, Harrisburg, is considering a Chapter 9 bankruptcy because it lost so much money in one operation it could have left to the private sector that the entire city government is now at risk of collapse.  This case was reported in today's issue of The Wall Street Journal.  Harrisburg incurred a debt of $288 million in an attempt to renovate an incinerator!  It owes $68 million in payments this year on this debt, but its entire annual budget is less than that amount.

Chapter 9 bankruptcy entails:

• A municipal government can reduce its debt even if the chief creditors oppose such a reduction.
• The settlement must have the support of at least one class of impaired creditors.
• An automatic stay of all litigation against the city occurs.
• The city can reject union contracts.
• Bankruptcy prevents judges from forcing asset sales or liquidation of the municipality.
• Pennsylvania's Community and Economic Development Dept. must approve the Chapter 9 bankruptcy and work with the city in the bankruptcy proceedings.
• The city must expect to pay huge fees to lawyers and accountants.
• The outcome of the request for bankruptcy is uncertain.  It could be rejected.
• Assured Guaranty Municipal, which assured the bond payments, will have to make the payments at great loss to it.
• Covanta Energy operates the incinerator and gave the city a loan of $25 million, which the city cannot repay in whole.

City Controller, Daniel C. Miller, favors this Chapter 9 way out of the city's predicament.   The first Pennsylvania municipality to use Chapter 9 bankruptcy was Westfall Township in Pike County.  They faced a legal claim of more than $20 million to a real estate developer.  The settlement was reduced to $6 million over a 20 year repayment period with no interest.  But, its bill from the lawyers and accountants was $600,000.  If its request for bankruptcy had been rejected, the lawyers and accountants fees would have put Westfall Township into even worse shape.

Of course a Chapter 9 bankruptcy may allow the city of Harrisburg to go on.  But, after the loses that creditors and bond guarantors will take, the city will still be in a tough situation.  First, it will still have to pay a substantial amount of money.  Second, it will have impaired its credit for quite some time.  These factors are likely to force a reduction of other services the city has provided its residents.  Some of these impaired services are likely to be its legitimate services.  In addition, the city's irresponsible actions will certainly hurt its creditors and those who invested in them.  Governments have no business causing such harm.

All of this grief could and should have been avoided by simply leaving to the private sector what is the private sector's.  Leave unto Commodore Vanderbilt what is Commodore Vanderbilt's.  Leave unto J. J. Hill what is J. J. Hill's.  Leave unto John D. Rockefeller what is John D. Rockefeller's.  When government leaves unto the private sector all functions which are not legitimate to it, any risk is taken only by those who have chosen to undertake it voluntarily and the legitimate functions of government are not put at risk.