From Volume 36, Issue 33 of EIR Online, Published Aug. 28, 2009

U.S. Economic/Financial News

New Report: States' Revenue Holes Are Bottomless

Aug. 18 (EIRNS)—"At least half the states already" are in the red, "less than a month after their new budgets began July 1," according to, a project of the Pew Center on the States, which, on Aug. 17, posted its annual review of all 50 states.

Just six weeks into the new fiscal year, there are calls for legislative emergency sessions. For instance, on Aug. 11, Nevada Gov. Jim Gibbons said, given his state's plunge in gaming tax revenue, which funds 27% of Nevada's spending, "If it gets to a point where we no longer can make adjustments, we will have to consider a special session and the Legislature's help."

In Maryland, Gov. Martin O'Malley must identify, by September, where $700 million must be cut from "new budget" spending, because the legislature is out of session. He has found $250 million, and told the Maryland Association of Counties Aug. 15 that he has "trouble sleeping," over the prospect of $470 million more in cuts ahead.

Pennsylvania, Connecticut, and Arizona have not yet even managed to come up with a pretense of an FY2010 budget, because of their impossible revenue-to-spending gap.

Various think tanks put the states' two-year (FY2009 and 2010) revenue losses between $215 billion and $275 billion—but that involves a linear projection in a situation which is actually a meltdown.

According to the study, cuts made to "balance" the FY2009 budgets were:

* 35 states cut higher education or increased tuition;

* 26 slashed prison funding, with 7 states closing prisons;

* 17 states forced state workers to take furloughs or unpaid leave, affecting 850,000 people;

* 4 states required Medicaid patients to pay more for care; and

* 8 states cut optional Medicaid benefits such as dental care.

But it gets worse. To enact their new, failing, FY2010 budgets, 15 states have incorporated further cuts to Medicaid programs. "Some 40,000 poor people were cut from Washington State's basic health-care plan, and another 29,500 poor adults lost coverage when Minnesota eliminated a program for individuals who don't qualify for Medicaid," the report states. These individuals are the poor people who are non-elderly, childless, or whose income is too high to qualify for medical assistance.

Colorado Makes More Medicaid Cuts

Aug. 19 (EIRNS)—On Aug. 18, Colorado Gov. Bill Ritter, faced with a $318 million revenue shortfall just six weeks into the new fiscal year, sharpened his budget knife as he announced $216 million in new cuts to the FY2010 budget. First on the chopping block: Medicaid payments. He will cut Medicaid reimbursement rates, which had been cut earlier by 2%, in the new budget, for the fiscal year that started July 1. Now they will be cut by 1.5% for providers, and 2.5% for providers of behavioral-health and developmental-disability services, the Denver Business Journal reports. The cuts will "save" $34.2 million, but kill how many? Many doctors will "rethink their participation in the Medicaid program," a Colorado Medical Society spokesman said.

Also at risk, are the state's 15 community health centers that provide services to low-income residents. The centers "will be scrambling to manage the consequences of these cuts. Measures that may have to be taken include reducing services, cutting back on hours of service, and reducing staff," a Colorado Community Health Network statement said.

Four More U.S. Banks Bite the Dust, Bringing Total to 81

Aug. 21 (EIRNS)—Four U.S. banks failed today, bringing the total to 81 for the year, as the rate of failures accelerates, and the size of the banks being closed grows. The closings bring the year-to-date assets of failed banks to $89 billion, and the deposits to $72 billion. This compares to 25 failures in all of last year, although the failure of the $307 billion Washington Mutual drove the assets of failed banks to $373 billion, and the deposits of failed banks to $235 billion.

Closed today were: Guaranty Financial of Austin, Tex.; CapitalSouth Bank of Birmingham, Ala.; First Coweta of Newnan, Ga.; and Ebank of Atlanta. All but Guaranty Financial were small banks, with assets and deposits under $1 billion. Guaranty Financial, with $13 billion in assets and $12 billion in deposits, was the second-largest bank to fail this year, topped only by last week's closure of Colonial of Montgomery, Ala. ($25 billion and $20 billion, respectively).

Guaranty Financial is the tenth-largest bank failure in U.S. history, and could only be closed because a sale had been arranged to BBVA Compass, the U.S. unit of Spain's Banco Bilbao Vizcaya Argentaria. The bank held some $3.5 billion of securities backed by adjustable-rate mortgages, with delinquency rates of around 40%.

The failure of Guaranty Financial marks a new phase of the U.S. banking collapse, as the values of mortgage-backed securities (MBS) plunge. As of March 31, U.S. banks and thrifts held $13.5 trillion in such securities, or 16% of total assets, signalling more carnage to come from MBS, on top of the mounting losses from ordinary loans. Nearly 1,400 banks own "private label" MBS, bought from Wall Street firms and carrying no government guarantees. Banks are also being hit by losses on some $50 billion of "trust preferred securities," a form of collateralized debt obligation sold to them by the Wall Street sharks as safe investments. As the economy continues its collapse, losses of all types will accelerate.

State Budget Carnage Continues

Aug. 20 (EIRNS)—News media continue to report particulars of U.S. state and local budget crises spiralling out of control.

The Washington Post reported that Virginia Gov. Tom Kaine (D) said Aug. 19 that he might have to further cut core services, including education, health care, and public safety, and lay off employees. He may also borrow money from the state's "rainy-day fund" (evidently, it's pouring) to make up a $1.5 billion budget shortfall. Kaine will announce specific cuts early next month.

The Philadelphia CBS affiliate reported, citing Mayor Michael Nutter (D) and court officials, at a news conference yesterday, that Philadelphia's court system will face a "virtual shutdown" if the city, which is facing a $1.4 billion five-year budget deficit, does not get state approval for a sales tax increase and changes to how it makes its pension payments. Without those changes, Nutter says, nearly 1,000 police officers and 200 firefighters would have to be cut.

Britain's Economist magazine's news roundup noted that, in California, a state board voted to end health insurance for more than 60,000 children because of recent budget amendments.

AP and local TV report that in North Carolina, seven prison closings begin next month, causing relocation of 950-1,000 prisoners. 500-1,000 jobs will be cut in Department of Corrections.

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