From Volume 37, Issue 49 of EIR Online, Published Dec. 17, 2010

U.S. Economic/Financial News

U.S. States and Cities at Default Point

Dec. 6 (EIRNS)—Many states and municipalities are at the default point, despite all their destructive downsizing and cutting of essential government services, in an attempt to balance their budgets. The default phase is documented in a raft of new reports issued in December—the halfway point of most states' fiscal year, as well as the end of calendar year 2010. The dimensions of categories of state and local debts and obligations, which are summarized below, are, of course, a pittance in size, compared with the trillions of dollars of bailouts given to the banks. Nevertheless, these state and local claims are unpayable, if the physical economy is left to continue to disintegrate, and no Federal emergency measures are taken.

* Bonds. There is an estimated $2.8 trillion worth of outstanding bonds from states and municipalities, not counting other kinds of debts and obligations.

* Pension funds. There is an estimated $3.5 trillion owed to pension funds by states and localities. This is the "shortfall" in funding that has been racked up to these pension plans to date.

* Health-care benefits. Going forward, states and localities face an estimated $530 billion in payments for health care benefits, according to the Government Accountability Office.

* State budget deficits. At present, the combined state budget deficit seen for 2011-2012 (starting next July), is $40.5 billion; and a hole of $40.9 billion for 2012-2013. (From the National Governors Association, and National Association of State Budget Officers, Fiscal Survey of the States, released in October).

All of the above are just linear projections, and are in fact getting worse by the hour. Moreover, Federal funds have accounted for up to 30% of state expenditures over last year, up from 20-25% the year before. But as of this Summer—the start of the new local fiscal year—Federal funds are set to be drastically cut back.

Some local governments are attempting to borrow just for operating budgets, not for capital, or special-purpose financing. No U.S. state has defaulted on its bond obligations since the Great Depression, but that record is set to be broken fast.

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