State Budget Crisis Question: How Can We Fix America's Deadbeat States?

State governments are broke, and things are going to get worse before they get better.

A whole lot worse.

Look at California. It's facing a $19 billion budget deficit next year and had to raise tuition in the state university system by 32% to try and collect revenue.

Arizona sold off its state capitol, state Supreme Court building and legislative chambers to a group of investors that is now leasing them back. 

And take Illinois, which spends twice as much as it collects in taxes and is six months behind on a stack of bills totaling $5 billion. Illinois state employees – including state troopers needing to gas up their patrol cars – are finding some places won't honor their state credit cards. And legislators are getting evicted from offices because the Illinois government failed to pay the rent.
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Little wonder the "Prairie State" now has a new nickname: the "Deadbeat State."

The aggregate budget deficit of the 50 U.S. states is in the tens of billions of dollars. Collectively, they owe $1 trillion in pension payments. And come spring, the $160 billion federal stimulus spigot will be turned off – yanking the financial IV that kept many states running during the recession.

These problems could lead to the loss of one million state and local government jobs, could create a roadblock to the U.S. economic recovery, and could force another federal stimulus package that the federal budget can't afford.

In the expose "State Budgets: The Day of Reckoning" that aired Sunday, the CBS News 60 Minutes program turned the spotlight on the looming state-budgetary meltdown. Financial analyst Meredith Whitney, who predicted the U.S. banking collapse and the crisis that followed, has now directed her financial-soothsaying skills at the states.

She's spent the last two years studying this crisis, and doesn't like what she sees.

"Next to housing, this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy," Whitney told correspondent Steve Kroft.

New Jersey Gov. Chris Christie, who has been busy cutting projects, jobs and benefits to make up his state's $10 billion budget deficit, agreed with Whitney, and told CBS' Kroft that "the day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's coming.'"

Whitney said one of the worst things about the state budget crisis is how unaware everyone still is of the issue's severity.

"The most alarming thing about the state issue is the level of complacency," said Whitney. "The lack of transparency with the state disclosure is the worst I have ever seen."

Whitney said the fiscal issues will be passed down to local governments that could face bankruptcy, and she's certain that the state budget crisis will lead to municipal bond defaults reaching hundreds of billions of dollars. This may surprise investors who were led to believe the cities and states were in better financial shape than advertised when they issued the bonds.

Money Morning Contributing Editor Martin Hutchinson warned investors in July to avoid the muni sector, citing the exorbitant state budget shortfalls.

"[I]t seems hopelessly unlikely that all the vulnerable states - and there are perhaps a dozen with considerable degrees of vulnerability - will be able to save themselves this time around," said Hutchinson. "And this will all come back to bite investors."

Twenty-six new state governors will take office in 2011. Most are looking at budget cuts and tax increases – moves that were previously viewed as politically impossible. But the reality is that even-more-draconian measures will be necessary if states are to weather this storm.

These choices include deeper cuts in education spending, pension payments and benefits for state employees. 

"We now have to get to the business of climbing out of the hole. We've been digging it for a decade or more. We've gotta climb now, and a climb is harder," said New Jersey Gov. Christie.

This brings us to next week's Money Morning "Question of the Week:" What's the cure for deadbeat U.S. states? Do states need to raise taxes, cut programs, lay off workers, and/or slash benefits? How have you been affected by your states' poor financial condition? How concerned are you about the severity of our U.S. state budget crisis?

Send your answers to [email protected]. We want to hear from you!

[Editor's Note: Is there a topic you want to see covered as a "Question of the Week" feature? Then let us know by e-mailing Money Morning at [email protected]. Make sure to reference "question of the week suggestion" in the subject line.

We reserve the right to edit responses for length, grammar and clarity.

Thanks to everyone who took the time to participate – via e-mail or by posting their comments directly on the Money Morning Web site.]

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