From Volume 38, Issue 1 of EIR Online, Published Jan. 7, 2011

U.S. Economic/Financial News

States Disintegrate without Federal Intervention

Dec. 27 (EIRNS)—California's repeated use of scrip to pay employees and bills, and Illinois' hawking its general revenues to Wall Street for "sub-subprime" loans, are the signposts of where the state government collapse is headed without Lyndon LaRouche's proposed solutions.

The 50 states' overall tax revenue collections in this fiscal year, FY2011, are 12% lower than in FY2008 (having been still lower in FY2010); this is easily the largest revenue drop in recorded U.S. data.

But the states' collective budget shortfalls are much larger than that, due to suddenly increased demands on Medicaid, unemployment benefits, and indigent and other services. The 50 states' shortfall for FY2010 was $191 billion, some 29% of their planned budgets, reports the Center for Budget and Policy Priorities; Federal aid filled $68 billion, leaving them the remainder to handle.

But after raising state taxes by a combined $24 billion across the country, and making widespread cuts particularly hitting Medicaid, so that their combined planned budgets for FY2011 was slightly smaller than that for FY2010, the shortfall for the states' FY2011 budgets was again 23% ($161 billion). Federal aid filled in $59 billion, leaving the states to handle the rest. In response this year, the states only raised taxes by $6 billion; the rest took the form of devastating service cuts. And now, for FY2012, the states' projected shortfall for FY2012 is again 20% ($135 billion), and almost no Federal aid is allowed to offset this under Obama's tax "deal" with the Republicans. In fact, during FY2012, the states will be obligated to repay the Federal government at least $42 billion in funds which they have borrowed to pay unemployment benefits.

Municipal Bankruptcies Loom; No Solution But Glass-Steagall

Dec. 28 (EIRNS)—Many cities and counties across the country are faced with growing deficits, despite two or three years of budget cuts. Hamtramck, Mich., whose story was told in an LPAC-TV video 5 weeks ago ( is featured in a New York Times story this morning, but what's happening to Hamtramck is not unique by any means. Hamtramck is rapidly running out of cash to pay its bills, and is seeking permission from the state to declare bankruptcy. But state officials are afraid that if they say "yes," they'll have 30 more cities lining up to follow the same path. "There could be many cities in this position, next year," said Summer Hallwood, director of state affairs for the Michigan Municipal League. "All our communities have done is cut, cut, cut. They're down to four-day work weeks and the elimination of parks, senior centers—all of that. So, if there's anything else that happens, they will be over the edge."

The story is the same everywhere. At least two cities in Michigan, Flint and Benton Harbor, are under the control of emergency financial managers, and numerous others have savagely reduced essential services, including public safety, in futile efforts to balance their budgets.

In the 2010 census, Michigan was the only state to actually lose population—which was caused by the failure of its Congressmen to support LaRouche's plan to transform the auto industry into a machine-tool-driven engine for industrial production. Michigan will lose a Congressional seat in 2012, which makes a total of five seats lost in Michigan since 1980—the equivalent of losing the political clout of state the size of Oklahoma.

Michigan's story is replicated in New Jersey, California, Florida, Washington, and Ohio, among other states. Local governments have been hammered by collapsing tax revenues, reductions in state aid, and structural imbalances blamed on pension obligations and labor contracts. In response, local governments reduced spending in real terms by 0.6% in 2008 and by 1.9% in 2009. According to a recent survey by the National League of Cities, more than 90% of cities responding, expected to cut expenditures in 2010 below levels needed to maintain services at the previous year's level.

The Congressional Budget Office calculated, in a December 2010 report, that local governments shed 241,000 employees, or 1.7%, between December 2007 and November 2010.

As for municipal bankruptcy, banking analyst Meredith Whitney predicted on CBS's 60 Minutes last week, that there will be 50-100 municipal defaults in the next year, which would be devastating for the bond markets—a major course of capital for states and municipalities. The only option that's really presented as a solution, besides default, is bankruptcy under Chapter 9 of the Bankruptcy Code, but it's a very limited option that is only available if state law allows it. Only 26 states authorize local governments to file for bankruptcy under Chapter 9, and 14 of them require that the municipality seek approval from a state authority. The other 24 states either prohibit it, or have no provision allowing it—meaning under the Federal law, local governments can't file unless the state passes a law explicitly allowing them to do so. Even where allowed, municipal bankruptcy can be a very difficult procedure, with no guarantee that a city will emerge from bankruptcy in more than marginally better shape than when it went in. Bankruptcy is not even allowed for states, leaving Federal aid as the only real option.

Municipal bankruptcy, on a case-by-case basis, is, in fact, no solution to this problem. Not only can bankruptcy take years to work through; it does nothing to address the underlying economic crisis. The only real solution to this spreading crisis is the removal of Barack Obama from the Presidency, the immediate restoration of Glass-Steagall, and emergency Federal aid to the state and local governments to maintain essential functions. Nothing short of these measures will save the cities and towns of America.

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