Will the States March to Washington
for Their Own Bailouts?

What the Congressional Budget Office (CBO) is not taking into account in its deteriorating projections for the budget deficits in Medicare and Social Security in this country is the worsening of state and municipal pension and Medicaid budget deficits.

The CBO estimates are based on the Federal program and the Federal government’s responsibility to Medicare and Social Security. However, if the states can’t pay for Medicare and Social Security, who is going to take responsibility for these budget deficits?

I have written often in these pages about the crumbling budget deficits at the municipal and state levels.

The CBO is saying that Medicare will run out of money by 2024 and Social Security will run out by 2035, but the Federal government has cut state funding, as both the state and municipalities struggle under this supposed economic recovery.

If the Federal government needs to pay for Medicare and Social Security, it will need to print money, but what recourse do states have if their revenues are not enough to cover these costs?

Let’s take the state of Illinois as an example. This week, it was reported that its backlog of unpaid bills has reached $9.0 billion, with most of its budget deficit related to pensions (source: Bloomberg, April 23, 2012).

There has been a small economic recovery, which has increased Illinois’ tax revenue by 3.9% or $7.0 billion from corporations and individuals in the past nine months. However, this increase in revenue was not enough to offset the losses from the Federal government cutting its financial support to Illinois, further deepening the budget deficit.

With the unemployment rate still persistently high within the economic recovery, tax revenues have not returned to levels seen in 2007, further degrading budget deficits at the state and municipal levels.

The largest revenue generator for municipalities is real estate taxes. The housing market continues to languish and, with home prices not rising, tax revenues drop, which leads to a further decline in budget deficits.

The only recourse left is to raise taxes. With this supposed economic recovery, I wish them luck. Illinois has proposed a three-percent increase in pension contributions from current employees, while the inflation-adjustment increases in pension payments are set to be cut.

California is proposing raising taxes on high-income earners and a small increase in the state’s sales tax. Although the governor is stating that these hikes are to fund education and public safety, The Wall Street Journal is reporting that the revenue from the tax hikes is really being used to fill the large budget deficit in the teachers’ pension fund.

California cut its Medicaid payment rate by 10%, but the California Medical Association sued the state and won. The court agreed with the Medical Association stating that the 10% cut would result in inadequate care to patients, and would actually harm patients who are entitled to a basic level of care.

California is cutting money to Medicaid and raising taxes to fund pensions. However, as the economic recovery has no traction, the budget deficits will continue to worsen to the point where California, and many other states, will visit the White House and ask them for money to fund their pensions and Medicaid. Where will Washington get the money if needs to bailout the states? It will print more money.