Serious Financial Troubles at U.S. Municipal Level Mount

Serious Financial Troubles at U.S.Indianapolis, Indiana, home to the Indianapolis 500, this year played host to the Super Bowl. With a population of close to 840,000, it is the 12th largest city in the U.S.

Indianapolis is presently searching its budget deficit to find money to pay for its electricity bill for March. Just two months into 2012, Indianapolis faces a budget deficit of $75.0 million!

Around $15.0 million of that budget deficit is being blamed on public safety, and the police stations are incensed that they may have to lay off people, because they say they will have a hard time managing jailed criminals.

The biggest problem concerning Indianapolis’ budget deficit is the hole in its pension fund, to meet all of the payments for retirees. This budget deficit issue is being brought to the state level.

Speaking of states, Pennsylvania is enacting budget cuts to meet its budget deficit. These deficits are spreading like cancer throughout many of the municipalities and states in the U.S.

I’ve been documenting, dear reader, how new employee pension plans in many distressed municipalities are being severely slashed in order to meet budget deficits. These same municipalities are raising taxes, and cutting benefits for current retirees and those employees already in the system, while advising the latter that their retirement plans will have to be changed, because the age they are eligible for retirement is now going up due to budget cuts.

Pennsylvania has attempted to enact all of the above except, until this point, raising the retirement age for current employees. With the retiree-to-employee ratio at a staggering 6-to-1, other budget cuts will have to be implemented, because the state faces a pension budget deficit that is just massive in the next few years.

A public pension bubble in the State of California is going to burst in the very near future. The California State Teachers’ Retirement System estimates its budget deficit to be in the vicinity of $42.6 billion. It says it would have to earn 20% a year for each of the next five years to make up the shortfall. I have a better chance of being on the next space shuttle to the moon than that does of occurring.

Those municipalities within California that are attempting to pass higher taxes onto citizens are facing an expected backlash, especially during these difficult economic times. As for new employees entering the California system, they can forget full pensions from the state and retiring early.

Los Angeles, where pension costs are expected to consume 19% of the budget, is attempting to scale back pensions for police officers and firefighters through budget cuts, as it attempts to meet its budget deficit. Naturally, there is great opposition, but, as the mayor points out, if nothing is done, the budget deficit will reach $1.0 billion in three short years.

The City of San Diego has slashed services and, as a consequence, laid people off, as it tries to close its $179-million budget deficit, with pension obligations being the largest part.

The frequency with which I’m talking about this issue is alarming even to me, dear reader. I can assure you this is not the last we’ll be hearing of these budget deficit problems. The pattern is that the distressed municipalities are throwing their arms in the air, unable to meet their budget deficits through budget cuts, and simply heading to their states for solutions. (Also see: U.S. Municipalities Falling Like Dominos.)

How long before the states run out of options and throw their arms in the air, turning to Washington for solutions to their budget deficits?

The problem with major budget deficits at the municipal and state level is only one of the reasons I believe we are far from being “out of the woods” with the U.S. economy. If interest rates start to rise, which I am predicting they will, budget deficits will only increase. While most of my colleagues will beg to differ, stuck in a debt spiral that can only be fixed by money printing, I see more difficult times ahead for America, not better times.

Michael’s Personal Notes:

A familiar bubble north of the border…

Canada’s economy has been hailed as one of the better performing economies in the world since the financial crisis hit in 2007. Canada’s job market has stayed relatively stable, which is why the housing market has been so strong.

Canadian home prices have increased steadily since the financial crisis hit, which I’m sure will come as a big shock to the average American.

In 2011, average home prices increased 4.3% in Canada, but in the final quarter of the year, it slowed to just a 1.1% rise. Thus far in 2012, the slowdown in the appreciation of home prices has continued.

Building permits in Canada have been contracting over the last four months after rising steadily most of last year. The global economic slowdown has pressured the jobs market in Canada, which in turn is putting pressure on home prices and the housing market.

The Bank of Canada, very similar to the Federal Reserve here in the U.S., has kept interest rates at record lows and is looking to keep its one-percent target rate at least till 2013.

Very similar as well are the inflation numbers that are coming out of Canada. The country’s Consumer Price Index (CPI) increased at an annual rate of 2.6% in February from January’s 2.5% rate. This is the fastest rate of inflation the country has experienced in three years!

All of the major inflation components rose, including home prices and the housing market. Food, gas, the cost of electricity and items like car insurance all jumped higher. With this backdrop, the Bank of Canada is talking about raising interest rates sooner than later.

Shockingly, the major Canadian banks have actually lowered mortgage rates in the housing market to historic lows. Ads like this one are popping up in major newspapers all over the country.

Royal Bank Canada

(Source: Globe and Mail, Mar. 12, 2012)

If this sends a chill down my readers’ spines, it should. Canadian banks are responding to the slowing housing market and are trying to reinvigorate home prices and the housing market.

Unlike the Federal Reserve’s response in 2007, the Bank of Canada is extremely worried about the housing market in Canada, repeatedly warning that Canadians are getting into too much debt.

I’ve spoken to people in the hottest parts of the housing market in Canada: the cities of Toronto and Vancouver. There are more condo buildings going up in Toronto (over 100 planned) than any other city in the world. People are buying into the Canadian housing market believing that home prices “can’t go down.” This is similar to the feeling in America before U.S. housing prices started to collapse.

It gets worse. When the housing market finally popped toward the end of 2007 here in the U.S., the average American’s debt-to-income level was 127%. This means that the average American had $1.27 of debt for every dollar of disposable income earned. Since the end of 2007, the average American has been trying to pay down the debt and we are—in 2012; four years later—somewhere in the neighborhood of 1-to-1 currently (that is one dollar of debt for every dollar of disposable income).

In Canada, currently, the average Canadian is setting record levels of debt-to-income among industrialized nations. For every dollar of disposable income Canadians are earning, they are taking on very close to $1.51 of debt.

It may be a year or two away, but Canada is set up potentially for a very nasty, very protracted fall in home prices.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up eight percent for the year. The bear market rally started strong this year, but is starting to lose steam as it fails to move higher up on the 13,000 ladder.

There are cracks starting to develop in the stock market’s advance, but they are early ones. In particular, the number of bearish stock advisors is falling rapidly. The current trend among stock advisors is more bulls and less bears, something we start to see near a market top.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.