Fire the Teachers and Police and Re-hire Them?

budget deficitsThe budget deficits among many municipalities in theU.S. are running deeper into the red because of rising pension benefits and lower municipal tax revenues. As such, many municipalities are coming up with some very creative thinking on deficit cuts.

Highland Park, Michigan, has three schools responsible for educating 1,000 students, but its education budget deficit has ballooned to $11.3 million. (Source: Wall Street Journal, August 2, 2012.)

After many attempts at deficit cuts, the school finally had to concede budget deficit defeat and turn its three schools over to a private school company. In a five-year deal, Leona Group will take over the schools from the district of Highland Park, promising to improve student performance.

So even though Leona Group is not responsible for the budget deficit, how does it prevent itself from falling into the same budget deficit trap as themunicipalityofHighland Park?

It lays off all the workers in the three schools—voiding any union deals that come with generous pay and benefits that these workers had—then rehires most of them under new terms of agreement with less pay and benefits. That is one way to achieve deficit cuts. Although, I’m not sure how motivated teachers will be in providing the highest level of education possible under such a deal.

InCamden,New Jersey, the mayor is frantically searching for ways to meet the municipality’s budget deficit. The mayor is concerned about security after having already laid off 300 police officers as part of its deficit cuts. Now, the mayor may decide to outsource all of its security to a county-wide police force.

Under the proposed deal, Camdenwill lay off all of its police force and place its security under a county-wide police force. (Source: Gloucester County Times, August 8, 2012.) The cost forCamden to the county-wide police force will not change. However, under the county-wide deal, 400 police officers would patrol its streets instead of the 270 currently on patrol. That is one way to institute a deficit cut and one way to meet a budget deficit.

The Detroit Institute of Arts is an institution that has been around for over 125 years. With fewer major local benefactors and due to their mounting budget deficits, the State ofMichiganand the City ofDetroitcut their funding to the institute as part of their deficit cuts, forcing the institute to come up with a creative solution.

Faced with budget deficits itself, the museum asked the voters of Detroitand surrounding municipalities to pay a tax for keeping it afloat for another 10 years. (Source: New York Times, August 8, 2012.) For every $150,000 that their home is valued,Michigan tax payers would offer up $15.00 a year in support of the Detroit Institute of Arts.

Without this revenue, the Institute would be forced to open only two days a week and cut staff as part of its deficit cuts to meet its budget deficit. The voters did agree to the new tax, much to the delight of the 125-year-old institute.

The measures being taken by municipalities to meet their budget deficits could be seen as creative, but they are so uncommon and mostly unprecedented that they smell of desperation, dear reader.

As the budget deficits continue to mount and deficit cuts become insufficient, the creative measures will run out and municipalities will tell their respective states to deal with the budget deficits. But the states—which have no money—will have to call upon the White House.

The upcoming municipal and state crisis could take everyone by surprise.

Michael’s Personal Notes:

Besides the municipal and state debt and credit crisis, there is another credit crisis looming that could spell disaster for theU.S. economy: the student loan credit crisis.

Earlier this year, student debt crossed the $1.0-trillion mark—more than consumer spending on credit cards. (Source: Bloomberg, July 17, 2012.)

The reason the dollar amount is so high is that, according to the Federal Reserve Bank ofNew York, the average loan for students has skyrocketed 55% to $24,301 since 2005. Luckily, we’re being told there is no inflation in theU.S.!

In 2001, there were 794,000 households that owed at least $50,000 in student loans. Today, that number has ballooned to over three million households! No credit crisis or inflation here, dear reader! (Source: Wall Street Journal, August 8, 2012.)

What has the New York Federal Reserve Bank so concerned about this potential credit crisis is that the rate of growth in mortgages during the crisis did not accelerate as fast as student debt is growing right now. (Source: Reuters, July 18, 2012.)

In other words, the spectacular housing bubble that caused the economic slowdown we are still in did not grow as fast as student debt is growing today!

The New York Federal Reserve Bank reveals that an incredible 12% of student borrowers (parents most likely) between the ages of 40 and 49 are at least 90 days behind on their payments! As I’ve mentioned before, this is the age group that is traditionally at their peak earning years. This is the group with the highest discretionary income, which is why the group leads in consumer spending.

Instead, they can’t even make payments! This is why it is a credit crisis and will continue to provide a major headwind to consumer spending.

The New York Federal Reserve Bank also witnessed a huge leap in student debt owed by those households with combined incomes of $94,535 to $205,335. This is no surprise, as falling home prices and a flat stock market means these households experienced a decline in wealth, while tuition costs continued to jump higher. This is what makes it a credit crisis.

Roughly 33% of all households earning between $95,000 and $125,000 didn’t save for their children’s education, because they attempted to save for retirement or simply spent the money. Now their only option to have their son or daughter attend college is to take on more debt, which only exacerbates the credit crisis.

The Federal Reserve Bank of New Yorkis warning that this is unsustainable. The problem is that the average household experienced a decline in net worth. The Wall Street Journal estimates that, from 2007 to 2010, the average household lost 19% of its wealth! Credit crisis?

Add to this mixture the fact that student tuition costs have more than doubled since 1985 (growing at a much faster rate than inflation) and this creates a heavy burden. Finally, to complete the recipe for this disastrous credit crisis, add in the weak job market with the fact that incomes are not keeping up with inflation—never mind tuition costs—and the credit crisis is complete.

Where the Market Stands; Where it’s Headed:

On a technical basis, the stock market is testing the right shoulder of a head-and-shoulders pattern it completed in April of this year. What does this mean?

It means two things. Firstly, the stock market as measured by the Dow Jones Industrial Average is lower today than it was in April of this year. In addition, the stock market is trying to break out on the upside, something I believe it will be unsuccessful at accomplishing.

What He Said:

“The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling—and no one is talking about deflation but me. Fed governors are still talking about inflation—they’ve got it wrong. There’s no need for me to get into the dangers of deflation, as I’ve written about them (many times) before. Let’s just put it this way: deflation is about the worse economic state a country will experience. The risks to the U.S.economy in 2007 are greater than I’ve seen in years.” Michael Lombardi in Profit Confidential, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.