U.S. State Budget Deficits: Cracks Widening

Over the last couple of years, I’ve talked about the dire financial position many U.S. states are in. Their budget deficits are going to remain an issue in 2012. And they are going to continue to be a drag on the unemployment numbers.

 In the latest unemployment figures released this past Friday, government payrolls fell by 14,000 in December. In the last 12 months, governments (mostly at the state level) have shed 276,000 jobs (source: Bureau of Labor Statistics).

An example of the dire situation: California’s state controller warned lawmakers last week that the state would run out of money if actions were not taken to come up with the $3.3-billion budget deficit shortfall.

 The state said that it had budgeted enough cash-on-hand until June of 2012, but state tax revenues coming in lower than expected are turning California’s budget deficit upside down, thanks to the economic slowdown.


 In order to meet the current $3.3-billion budget deficit shortfall, the state enacted bills to borrow from existing state accounts—to the tune of $865 million—and delayed payments to universities, counties and Medi-Cal, in the amount of $2.4 billion.

 New Jersey implemented measures last year to try reducing its budget deficit and meeting its unfunded pension liabilities. The state cut the cost of living increases for all retirees and raised the retirement age for new employees, among other measures.

 Despite this, the Pensions and Benefits division of New Jersey reported an increase of $5.5 billion in the pension deficit, which brings the total pension deficit to a whopping $41.8 billion. This means that the state will fall short again this year of having enough money to pay out pensions. Revenue was also less than expected due to the economic slowdown.

 Speaking of pensions—coupled with Medicaid—the state of Illinois believes that its budget deficit will reach a staggering $9.2 billion by the time June 2012 rolls around. In response, the state will delay payments to other areas in order to fund the shortfall.

 The Civic Federation of Chicago, in a study of the budget deficit, believes that the delayed payments could triple in just five years—to $34.8 billion—as the state desperately tries to meet its Medicaid and pension liabilities. The Federation concludes that the situation is a financial disaster, and is urging the state to act immediately to find solutions to its budget deficit.

 The above are only three examples. Other states are in big financial trouble, too. These states are hoping to meet their budget deficit shortfalls with increased tax receipts. With the economic slowdown, however, those increased receipts are not materializing.

 The solution, for the most part, has been to delay payments to other areas of their economy. These payments cannot be delayed forever!

 To compound this, budget deficits continue to grow in this economic slowdown.

Let’s keep in mind, dear reader, that California’s GDP is over $1.9 trillion, which is six times the GDP of Greece (source: IMF)! The cracks in the economy have not gone away; they are widening. (See: Getting Used to Trillion-dollar Annual Deficits.)

Where the Market Stands; Where it’s Headed:

 Little by little, the Dow Jones Industrial Average has been making its way to 13,000. There have been some bumps on the road getting there (and today might be one of those bumpy days), but the fact is that the market is up 5.3% for the year so far. I believe the stronger the market is at the beginning of this year, the worse the year will be over all.

 We remain in a bear market rally in stocks that started in March of 2009. To date, the bear market rally has done an excellent job in luring investors back into the stock market—the primary purpose of Phase II of the bear market (where we are now): lure investors back into stocks before taking their money away again.

 What He Said:

 “The conversation at parties is no longer about the stock market, it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate, because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.