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August 11, 2020 | Welcome To The Third World, Part 31: Cities And States Are Bankrupt Without A Bailout

John Rubino is a former Wall Street financial analyst and author or co-author of five books, including The Money Bubble: What To Do Before It Pops and Clean Money: Picking Winners in the Green-Tech Boom. He founded the popular financial website in 2004 and sold it in 2022.

Lacking monetary printing presses, US cities and states tend to behave more like normal economic entities than do most nations. That is, they’re always balanced on the knife-edge of insolvency as taxes fail to cover the promises, legitimate and otherwise, that mayors and governors have made to voters.

Toss in the covid-19 lockdowns and – in a few especially badly-run places, continuing riots – and many if not most American cities and states are looking at functional bankruptcy, featuring mass layoffs of teachers, cops, librarians and pretty much every other kind of employee. Trash won’t be collected, libraries won’t open, 911 calls won’t be taken.

To repeat the guiding prediction of this series, American towns will look more like Caracas than Zurich.

The one hope mayors and governors have been nursing is a massive federal bailout that papers over unfunded pensions and ongoing operating deficits alike with trillions of newly created dollars.

This prospect seemed imminent just a couple of weeks ago. After all, in an election year how can Washington allow the above carnage? But now imminent seems to be off the table and even “inevitable” is in question. Republicans (who don’t much care about big cities run by the opposition) and Democrats (who desperately want a bailout, but maybe not as much as they want to crush Trump in November) can’t agree on a new plan and have, for now at least, given up trying.

So…let the descent begin. Here are some juicy quotes from a recent Associated Press article on the subject:

No federal relief leaves states, cities facing big deficits

Stay-at-home orders in the spring, business shutdowns and tight restrictions on businesses that have reopened are slamming state and local government revenue. In a June report, Moody’s Analytics found that states would need an additional $312 billion to balance their budgets over the next two years while local governments would need close to $200 billion.

Many states already are staring at ledgers of red ink. Texas is projecting a $4.6 billion deficit. In Pennsylvania, it’s $6 billion. In Washington state, the deficit is expected to be nearly $9 billion through 2023. California’s budget includes more than $11 billion in cuts to colleges and universities, the court system, housing programs and state worker salaries.

“Congress and the White House made a commitment to the governors that there would be a second round of relief for states — we are going to hold their feet to the fire until they uphold that commitment,” New Hampshire Gov. Chris Sununu, a Republican, said in a statement.

How soon that might happen is anyone’s guess. Congress has gone home, and President Donald Trump over the weekend took executive action to address what had been a key part of the negotiations. He extended an extra benefit for the jobless but cut it by a third — to $400 a week — and told states they would have to pick up 25% of the cost.

“Let’s be clear about something: States are going broke and millions of Americans are unemployed, yet the solution called for states to create a new program we cannot afford and don’t know how to administer because of this uncertainty,” New Jersey Gov. Phil Murphy said.

North Carolina’s 550 local governments anticipate a combined $600 million cumulative drop in revenue for the coming fiscal year, according to estimates from the state’s League of Municipalities.

The U.S. House of Representatives, where Democrats hold the majority, passed a coronavirus relief bill in May worth more than $3 trillion, with close to one-third of that going to state and local governments. In the Senate, which Republicans control, some senators didn’t want a new round of aid at all, in part because they were concerned about the ballooning federal deficit.

But of course in the end Washington will probably cave, and some form of bailout will pass. A few more trillion dollars will blink into existence and the pressure will shift from states and cities to the dollar itself.

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August 11th, 2020

Posted In: John Rubino Substack

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