Warning: The (Federal) Debt, Deficits Are HERE!

[asmodeus]

I'm of the mind that very few people should be able to appeal their property taxes, as any lowering is passed on to the rest of us. The whole system sucks.

[doctorwho]

Mar 9, 2010 15:40:19 GMT -6 asmodeus said:

I'm of the mind that very few people should be able to appeal their property taxes, as any lowering is passed on to the rest of us. The whole system sucks.

if they didn't make it so difficult--maybe had an on line system like some other states- this would be the right thing- also hard to pay property taxes on a $100K-$200K most of us will never see back out of our homes...feeding the state corruption pig so someone can get some more relatives on the payroll

[EagleDad]

I like the idea of hiring someone to challenge you property taxes - I'm going to look into it. If I can spend a couple of hundred and have someone do all the legwork it's worth it to me.

[doctorwho]

Mar 9, 2010 16:30:08 GMT -6 EagleDad said:

I like the idea of hiring someone to challenge you property taxes - I'm going to look into it. If I can spend a couple of hundred and have someone do all the legwork it's worth it to me.

keep us informed if you find someone reputable

[EagleDad]

Mar 9, 2010 15:40:19 GMT -6 asmodeus said:

I'm of the mind that very few people should be able to appeal their property taxes, as any lowering is passed on to the rest of us. The whole system sucks.

This year in particular however will be a nutt-fest. With no restrictions on who can appeal, and widely falling property values that the Assessor can not/will not take into account, I predict it will be a fighters battle - those that show up to take on the fight stand the best chance.

It is sort of a reverse tax, sadly.

[macrockett]

www.nytimes.com/2010/03/11/us/11kansascity.html?ref=us&pagewanted=print

March 10, 2010
Kansas City to Close Nearly Half Its Schools
By SUSAN SAULNY

KANSAS CITY, Mo. — The Kansas City Board of Education voted Wednesday night to close almost half of the city’s public schools, accepting a sweeping and contentious plan to shrink the system in the face of dwindling enrollment, budget cuts and a $50 million deficit.

In a 5-to-4 vote, the members endorsed the Right-Size plan, proposed by the schools superintendent, John Covington, to close 28 of the city’s 61 schools and cut 700 of 3,000 jobs, including those of 285 teachers. The closings are expected to save $50 million, erasing the deficit from the $300 million budget.

“We must make sacrifices,” said board member Joel Pelofsky, speaking in favor of the plan before the vote. “Unite in favor of our children.”

Mr. Pelofsky and other supporters of the closures made their case with the district’s data: enrollment has declined by half in the last 10 years alone, to 17,400 children, and the schools are only 48 percent full.

For decades, national education experts said, the Kansas City schools had not responded to changes in demographics that would have spared them such a drastic one-time cut. “Otherwise, this whole scenario would not be as wrenching as it now appears to be,” Michael Casserly, the executive director of The Council of the Great City Schools, a research and advocacy organization, said in a telephone interview.

An auditorium packed with children’s advocates and parents, some holding signs and screaming at board members, rejected that line of thinking.

“Where’s my daughter going to go?” wondered a parent, Rasheedah Hazziez, 33, after the vote. “I don’t have a car. What happened to the time when our schools had a future? I live in Midtown and we already had too many vacant buildings. Now we’re going to have more? I guess we’ll just keep falling.”

Less than a third of elementary students in the city schools read at or above grade level. And in most of the schools, fewer than a quarter of students are proficient at their grade levels. District officials say the closings will improve achievement by allowing the system to focus its resources.
--------------------------------------------------
Unbelieveable

[asmodeus]

Wasn't it Kansas City that spent enormous amounts of money years ago to prove that more dollars = better education, and the whole thing turned out to be a bust?

Yep, found it:

www.cato.org/pubs/pas/pa-298.html

An exceprt:

For decades critics of the public schools have been saying, "You can't solve educational problems by throwing money at them." The education establishment and its supporters have replied, "No one's ever tried." In Kansas City they did try. To improve the education of black students and encourage desegregation, a federal judge invited the Kansas City, Missouri, School District to come up with a cost-is-no-object educational plan and ordered local and state taxpayers to find the money to pay for it.

Kansas City spent as much as $11,700 per pupil--more money per pupil, on a cost of living adjusted basis, than any other of the 280 largest districts in the country. The money bought higher teachers' salaries, 15 new schools, and such amenities as an Olympic-sized swimming pool with an underwater viewing room, television and animation studios, a robotics lab, a 25-acre wildlife sanctuary, a zoo, a model United Nations with simultaneous translation capability, and field trips to Mexico and Senegal. The student-teacher ratio was 12 or 13 to 1, the lowest of any major school district in the country.

The results were dismal. Test scores did not rise; the black-white gap did not diminish; and there was less, not greater, integration.

[macrockett]

www.suntimes.com/business/2101872,social-security-ious-031410.article#

Social Security to start cashing Uncle Sam's IOUs
Comments

March 14, 2010
ASSOCIATED PRESS

PARKERSBURG, W.Va. -- The retirement nest egg of an entire generation is stashed away in this small town along the Ohio River: $2.5 trillion in IOUs from the federal government, payable to the Social Security Administration. It's time to start cashing them in.

For more than two decades, Social Security collected more money in payroll taxes than it paid out in benefits -- billions more each year.

Not anymore. This year, for the first time since the 1980s, when Congress last overhauled Social Security, the retirement program is projected to pay out more in benefits than it collects in taxes -- nearly $29 billion more.

Sounds like a good time to start tapping the nest egg. Too bad the federal government already spent that money over the years on other programs, preferring to borrow from Social Security rather than foreign creditors. In return, the Treasury Department issued a stack of IOUs -- in the form of Treasury bonds -- which are kept in a nondescript office building just down the street from Parkersburg's municipal offices.

Now the government will have to borrow even more money, much of it abroad, to start paying back the IOUs, and the timing couldn't be worse. The government is projected to post a record $1.5 trillion budget deficit this year, followed by trillion dollar deficits for years to come.

Social Security's shortfall will not affect current benefits. As long as the IOUs last, benefits will keep flowing. But experts say it is a warning sign that the program's finances are deteriorating. Social Security is projected to drain its trust funds by 2037 unless Congress acts, and there's concern that the looming crisis will lead to reduced benefits.

"This is not just a wake-up call, this is it. We're here," said Mary Johnson, a policy analyst with The Senior Citizens League, an advocacy group. "We are not going to be able to put it off any more."

For more than two decades, regardless of which political party was in power, Congress has been accused of raiding the Social Security trust funds to pay for other programs, masking the size of the budget deficit.

Remember Al Gore's "lockbox," the one he was going to use to protect Social Security? The former vice president talked about it so much during the 2000 presidential campaign that he was parodied on "Saturday Night Live."

Gore lost the election and never got his lockbox. But to illustrate the government's commitment to repaying Social Security, the Treasury Department has been issuing special bonds that earn interest for the retirement program. The bonds are unique because they are actually printed on paper, while other government bonds exist only in electronic form.

They are stored in a three-ring binder, locked in the bottom drawer of a white metal filing cabinet in the Parkersburg offices of Bureau of Public Debt. The agency, which is part of the Treasury Department, opened offices in Parkersburg in the 1950s as part of a plan to locate important government functions away from Washington, D.C., in case of an attack during the Cold War.

One bond is worth a little more than $15.1 billion and another is valued at just under $10.7 billion. In all, the agency has about $2.5 trillion in bonds, all backed by the full faith and credit of the U.S. government. But don't bother trying to steal them; they're nonnegotiable, which means they are worthless on the open market.

More than 52 million people receive old age or disability benefits from Social Security. The average benefit for retirees is a little under $1,200 a month. Disabled workers get an average of $1,100 a month.

Social Security is financed by payroll taxes -- employers and employees must each pay a 6.2 percent tax on workers' earnings up to $106,800. Retirees can start getting early, reduced benefits at age 62. They get full benefits if they wait until they turn 66. Those born after 1960 will have to wait until they turn 67.

Social Security's financial problems have been looming for years as the nation's 78 million baby boomers approached retirement age. The oldest are already there. As that huge group of people starts collecting benefits -- and stops paying payroll taxes -- Social Security's trust funds will shrink, running out of money by 2037, according to the latest projection from the trustees who oversee the program.

The recession is making things worse, at least in the short term. Tax receipts are down from the loss of more than 8 million jobs, and applications for early retirement benefits have spiked from older workers who were laid off and forced to retire.

Stephen C. Goss, chief actuary for the Social Security Administration, says the crisis has been years in the making. "If this helps get people to look more seriously at that in the nearer term, that's probably a good thing. But it's only really a punctuation mark on the fact that we have longer-term financial issues that need to be addressed."

In the short term, the nonpartisan Congressional Budget Office projects that Social Security will continue to pay out more in benefits than it collects in taxes for the next three years. It is projected to post small surpluses of $6 billion each in 2014 and 2015, before returning to indefinite deficits in 2016.

For the budget year that ends in September, Social Security is projected to collect $677 million in taxes and spend $706 million on benefits and expenses.

Social Security will also collect about $120 billion in interest on the trust funds, according to the CBO projections, meaning its overall balance sheet will continue to grow. The interest, however, is paid by the government, adding even more to the budget deficit.

While Congress must shore up the program, action is unlikely this year, said Rep. Earl Pomeroy, D-N.D., who just took over last week as chairman of the House subcommittee that oversees Social Security.

"The issues required to address the long-term solvency needs of Social Security can be done in a careful, thoughtful and orderly way and they don't need to be done in the next few months," Pomeroy said.

The national debt -- the amount of money the government owes its creditors -- is about $12.5 trillion, or nearly $42,000 for every man, woman and child in the country. About $8 trillion has been borrowed in public debt markets, much of it from foreign creditors. The rest came from various government trust funds, including retirement funds for civil servants and the military. About $2.5 trillion is owed to Social Security.

Good luck to the politician who reneges on that debt, said Barbara Kennelly, a former Democratic congresswoman from Connecticut who is now president of the National Committee to Preserve Social Security and Medicare.

"Those bonds are protected by the full faith and credit of the United States of America," Kennelly said. "They're as solid as what we owe China and Japan."

Copyright 2010 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

[macrockett]

www.washingtonpost.com/wp-dyn/content/article/2010/03/15/AR2010031503465_pf.html
Moody's warns nations to cut spending or risk AAA ratings

By Howard Schneider
Washington Post Foreign Service
Tuesday, March 16, 2010; A15

The United States and other top world economies need to make potentially painful government spending cuts or risk losing the high-grade credit ratings that have kept borrowing affordable, the Moody's rating agency said Monday.

Outlining the dilemma faced by policymakers in the United States, Great Britain, Germany and France, Moody's said that debt levels in the four large credit-worthy economies had reached the point at which they are at risk of being downgraded -- a step that would drive up interest rates, increase borrowing costs and mark a turn in perceptions about the world economy.

Economic recovery might ease the problem by increasing tax revenue, Moody's reported, but "growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion."

The dollar rose against major currencies despite the report, a reminder of its continued role as the world's reserve currency.

The agency said a downgrade did not appear imminent and expressed confidence that the four countries would come to grips with their fiscal problems. Germany, the report said, has included a new debt provision in its laws, and the United States has established a commission on spending reform.

But the report nevertheless emphasized the growing concern over government deficits worldwide. A possible default by Greece has focused attention on the wide discrepancy in the health of the European economies and prompted European Union officials to debate ways to help Greece and other economically weaker countries. Spending cuts in Greece have triggered strikes and social unrest in recent weeks.

In economically healthier European countries such as Germany, France and Great Britain -- as well as the United States -- policymakers face a no-less urgent quandary, Moody's said, as they craft an "exit strategy" for the emergency programs adopted in response to the economic crisis.

Those programs resulted in ballooning deficits as money was pumped in to stimulate the economy and prop up banking and financial institutions. Reducing spending too soon could undercut what is still considered a fragile economic recovery, Moody's said, but waiting too long could put the world's top economies at risk of a debt spiral in which financing deficits becomes increasingly difficult and expensive.

Delaying the needed spending controls "would test the patience of the market. . . . Although AAA governments benefit from an unusual degree of balance sheet flexibility, that flexibility is not infinite," Moody's wrote. "We believe that the ratings of all large AAA governments remain well positioned -- although their 'distance-to-downgrade' has in all cases substantially diminished."

All four countries have projected that debt will rise to 80 percent or more of annual economic production, the Moody's report said, adding that debt-servicing costs in those countries are approaching the level that might warrant a downgrade.

[macrockett]

www.nytimes.com/2010/03/25/business/economy/25social.html

March 24, 2010
Social Security to See Payout Exceed Pay-In This Year
By MARY WILLIAMS WALSH

The bursting of the real estate bubble and the ensuing recession have hurt jobs, home prices and now Social Security.

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.

“When the level of the trust fund gets to zero, you have to cut benefits,” Alan Greenspan, architect of the plan to rescue the Social Security program the last time it got into trouble, in the early 1980s, said on Wednesday.

That episode was more dire because the fund could have fallen to zero in a matter of months. But partly because of steps taken in those years, and partly because of many years of robust economic growth, the latest projections show the program will not exhaust its funds until about 2037.

Still, Mr. Greenspan, who later became chairman of the Federal Reserve Board, said: “I think very much the same issue exists today. Because of the size of the contraction in economic activity, unless we get an immediate and sharp recovery, the revenues of the trust fund will be tracking lower for a number of years.”

The Social Security Administration is expected to issue in a few weeks its own numbers for the current year within the annual report from its board of trustees. The administration has six board members: three from the president’s cabinet, two representatives of the public and the Social Security commissioner.

Though Social Security uses slightly different methods, the official numbers are expected to roughly track the Congressional projections, which were one page of a voluminous analysis of the federal budget proposed by President Obama in January.

Mr. Goss said Social Security’s annual report last year projected revenue would more than cover payouts until at least 2016 because economists expected a quicker, stronger recovery from the crisis. Officials foresaw an average unemployment rate of 8.2 percent in 2009 and 8.8 percent this year, though unemployment is hovering at nearly 10 percent.

The trustees did foresee, in late 2008, that the recession would be severe enough to deplete Social Security’s funds more quickly than previously projected. They moved the year of reckoning forward, to 2037 from 2041. Mr. Goss declined to reveal the contents of the forthcoming annual report, but said people should not expect the date to lurch forward again.

The long-term costs of Social Security present further problems for politicians, who are already struggling over how to reduce the nation’s debt. The national predicament echoes that of many European governments, which are facing market pressure to re-examine their commitments to generous pensions over extended retirements.

[Arch]

[macrockett]

www.chicagotribune.com/news/ct-oped-0329-krauthammer-20100329-2,0,6959340.column
chicagotribune.com
Get ready for a national sales tax

Charles Krauthammer

March 29, 2010

With the passage of ObamaCare, creating a vast new middle-class entitlement, a national sales tax of the kind near-universal in Europe is inevitable.

We are now more than $12 trillion in debt. The Congressional Budget Office projects that another $12 trillion will be added over the next decade. ObamaCare, when stripped of its budgetary gimmicks — the unfunded $200 billion-plus doctor fix, the double counting of Medicare cuts, the 10-6 sleight-of-hand (counting 10 years of revenue and only six years of outflows) — is at minimum a $2 trillion new entitlement.

It will vastly increase the debt. But even if it were revenue-neutral, ObamaCare pre-empts and appropriates for itself the best and easiest means of reducing the existing deficit. ObamaCare's $500 billion of cuts in Medicare and $600 billion in tax hikes are no longer available for deficit reduction. They are siphoned off for the new entitlement of insuring the uninsured.

This is fiscally disastrous because, as President Barack Obama explained last year in unveiling his grand transformational policies, our unsustainable fiscal path requires control of entitlement spending, the most ruinous of which is out-of-control health care costs.

ObamaCare was sold on the premise that, as House Speaker Nancy Pelosi put it, "health care reform is entitlement reform. Our budget cannot take this upward spiral of cost." But the bill enacted on Tuesday accelerates the spiral: It radically expands Medicaid (adding 15 million new recipients/dependents) and shamelessly raids Medicare by spending on a new entitlement the $500 billion in cuts and the yield from the Medicare tax hikes.

Obama knows that the debt bomb is looming, that Moody's is warning that the Treasury's AAA rating is in jeopardy, that we are headed for a run on the dollar and/or hyperinflation if nothing is done.

Hence his deficit reduction commission. It will report (surprise!) after the November election.

What will it recommend? What can it recommend? Sure, Social Security can be trimmed by raising the retirement age, introducing means testing and changing the indexing formula from wage growth to price inflation.

But this won't be nearly enough. As Obama has repeatedly insisted, the real money is in health care costs — which are now locked in place by the new ObamaCare mandates.

That's where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade . It's the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent.

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

Obama set out to be a consequential president, on the order of Ronald Reagan. With the VAT, Obama's triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan's strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes — then ultimately you have to reduce government spending.

Obama's strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.

Ultimately, even that won't be enough. As the population ages and health care becomes increasingly expensive, the only way to avoid fiscal ruin (as Britain, for example, has discovered) is health care rationing.

It will take a while to break the American populace to that idea. In the meantime, get ready for the VAT. Or start fighting it.

Washington Post Writers Group

Charles Krauthammer is a syndicated columnist based in Washington.

[e-mail]

[doctorwho]

Mar 29, 2010 10:16:48 GMT -6 macrockett said:

www.chicagotribune.com/news/ct-oped-0329-krauthammer-20100329-2,0,6959340.column
chicagotribune.com
Get ready for a national sales tax

Charles Krauthammer

March 29, 2010

With the passage of ObamaCare, creating a vast new middle-class entitlement, a national sales tax of the kind near-universal in Europe is inevitable.

We are now more than $12 trillion in debt. The Congressional Budget Office projects that another $12 trillion will be added over the next decade. ObamaCare, when stripped of its budgetary gimmicks — the unfunded $200 billion-plus doctor fix, the double counting of Medicare cuts, the 10-6 sleight-of-hand (counting 10 years of revenue and only six years of outflows) — is at minimum a $2 trillion new entitlement.

It will vastly increase the debt. But even if it were revenue-neutral, ObamaCare pre-empts and appropriates for itself the best and easiest means of reducing the existing deficit. ObamaCare's $500 billion of cuts in Medicare and $600 billion in tax hikes are no longer available for deficit reduction. They are siphoned off for the new entitlement of insuring the uninsured.

This is fiscally disastrous because, as President Barack Obama explained last year in unveiling his grand transformational policies, our unsustainable fiscal path requires control of entitlement spending, the most ruinous of which is out-of-control health care costs.

ObamaCare was sold on the premise that, as House Speaker Nancy Pelosi put it, "health care reform is entitlement reform. Our budget cannot take this upward spiral of cost." But the bill enacted on Tuesday accelerates the spiral: It radically expands Medicaid (adding 15 million new recipients/dependents) and shamelessly raids Medicare by spending on a new entitlement the $500 billion in cuts and the yield from the Medicare tax hikes.

Obama knows that the debt bomb is looming, that Moody's is warning that the Treasury's AAA rating is in jeopardy, that we are headed for a run on the dollar and/or hyperinflation if nothing is done.

Hence his deficit reduction commission. It will report (surprise!) after the November election.

What will it recommend? What can it recommend? Sure, Social Security can be trimmed by raising the retirement age, introducing means testing and changing the indexing formula from wage growth to price inflation.

But this won't be nearly enough. As Obama has repeatedly insisted, the real money is in health care costs — which are now locked in place by the new ObamaCare mandates.

That's where the value-added tax comes in. For the politician, it has the virtue of expediency: People are used to sales taxes, and this one produces a river of revenue. Every 1 percent of VAT would yield up to $1 trillion a decade . It's the ultimate cash cow. Obama will need it. By introducing universal health care, he has pulled off the largest expansion of the welfare state in four decades. And the most expensive. Which is why all of the European Union has the VAT. Huge VATs. Germany: 19 percent. France and Italy: 20 percent. Most of Scandinavia: 25 percent.

American liberals have long complained that ours is the only advanced industrial country without universal health care. Well, now we shall have it. And as we approach European levels of entitlements, we will need European levels of taxation.

Obama set out to be a consequential president, on the order of Ronald Reagan. With the VAT, Obama's triumph will be complete. He will have succeeded in reversing Reaganism. Liberals have long complained that Reagan's strategy was to starve the (governmental) beast in order to shrink it: First, cut taxes — then ultimately you have to reduce government spending.

Obama's strategy is exactly the opposite: Expand the beast, and then feed it. Spend first — which then forces taxation. Now that, with the institution of universal health care, we are becoming the full entitlement state, the beast will have to be fed.

And the VAT is the only trough in creation large enough.

As a substitute for the income tax, the VAT would be a splendid idea. Taxing consumption makes infinitely more sense than taxing work. But to feed the liberal social-democratic project, the VAT must be added on top of the income tax.

Ultimately, even that won't be enough. As the population ages and health care becomes increasingly expensive, the only way to avoid fiscal ruin (as Britain, for example, has discovered) is health care rationing.

It will take a while to break the American populace to that idea. In the meantime, get ready for the VAT. Or start fighting it.

Washington Post Writers Group

Charles Krauthammer is a syndicated columnist based in Washington.

[e-mail]

this cast of idiots has just doomed our children to a lifetime of massive taxation....I just cannot believe he was allowed to ram this thru Chicago style on a national stage.

at least it won't matter to those of us older- as soon as we can't pay for medical care anymore they'll just put us to sleep. The only ones who will be able to afford it when they're older are those with govenment pensions and health care..
I hope everyone who voted for this idiot is happy now -

[macrockett]

www.nytimes.com/2010/03/30/business/economy/30states.html?ref=economy&pagewanted=print

March 29, 2010
State Debt Woes Grow Too Big to Camouflage
By MARY WILLIAMS WALSH

California, New York and other states are showing many of the same signs of debt overload that recently took Greece to the brink — budgets that will not balance, accounting that masks debt, the use of derivatives to plug holes, and armies of retired public workers who are counting on benefits that are proving harder and harder to pay.

And states are responding in sometimes desperate ways, raising concerns that they, too, could face a debt crisis.

New Hampshire was recently ordered by its State Supreme Court to put back $110 million that it took from a medical malpractice insurance pool to balance its budget. Colorado tried, so far unsuccessfully, to grab a $500 million surplus from Pinnacol Assurance, a state workers’ compensation insurer that was privatized in 2002. It wanted the money for its university system and seems likely to get a lesser amount, perhaps $200 million.

Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated.

Some economists fear the states have a potentially bigger problem than their recession-induced budget woes. If investors become reluctant to buy the states’ debt, the result could be a credit squeeze, not entirely different from the financial strains in Europe, where markets were reluctant to refinance billions in Greek debt.

“If we ran into a situation where one state got into trouble, they’d be bailed out six ways from Tuesday,” said Kenneth S. Rogoff, an economics professor at Harvard and a former research director of the International Monetary Fund. “But if we have a situation where there’s slow growth, and a bunch of cities and states are on the edge, like in Europe, we will have trouble.”

California’s stated debt — the value of all its bonds outstanding — looks manageable, at just 8 percent of its total economy. But California has big unstated debts, too. If the fair value of the shortfall in California’s big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output, according to one calculation.

The state’s economy will also be weighed down by the ballooning federal debt, though California does not have to worry about those payments as much as its taxpaying citizens and businesses do.

Unstated debts pose a bigger problem to states with smaller economies. If Rhode Island were a country, the fair value of its pension debt would push it outside the maximum permitted by the euro zone, which tries to limit government debt to 60 percent of gross domestic product, according to Andrew Biggs, an economist with the American Enterprise Institute who has been analyzing state debt. Alaska would not qualify either.

State officials say a Greece-style financial crisis is a complete nonissue for them, and the bond markets so far seem to agree. All 50 states have investment-grade credit ratings, with California the lowest, and even California is still considered “average,” according to Moody’s Investors Service. The last state that defaulted on its bonds, Arkansas, did so during the Great Depression.

Goldman Sachs, in a research report last week, acknowledged the pension issue but concluded the states were very unlikely to default on their debt and noted the states had 30 years to close pension shortfalls.

Even though about $5 billion of municipal bonds are in default today, the vast majority were issued by small local authorities in boom-and-bust locations like Florida, said Matt Fabian, managing director of Municipal Market Advisors, an independent consulting firm. The issuers raised money to pay for projects like sewer connections and new roads in subdivisions that collapsed in the subprime mortgage disaster.

The states, he said, are different. They learned a lesson from New York City, which got into trouble in the 1970s by financing its operations with short-term debt that had to be rolled over again and again. When investors suddenly lost confidence, New York was left empty-handed. To keep that from happening again, Mr. Fabian said, most states require short-term debt to be fully repaid the same year it is issued.

Some states have taken even more forceful measures to build creditor confidence. New York State has a trustee that intercepts tax revenues and makes some bond payments before the state can get to the money. California has a “continuous appropriation” for debt payments, so bondholders know they will get their interest even when the budget is hamstrung.

The states can also take refuge in America’s federalist system. Thus, if California were to get into hot water, it could seek assistance in Washington, and probably come away with some funds. Already, the federal government is spending hundreds of millions helping the states issue their bonds.

Professor Rogoff, who has spent most of his career studying global debt crises, has combed through several centuries’ worth of records with a fellow economist, Carmen M. Reinhart of the University of Maryland, looking for signs that a country was about to default.

One finding was that countries “can default on stunningly small amounts of debt,” he said, perhaps just one-fourth of what stopped Greece in its tracks. “The fact that the states’ debts aren’t as big as Greece’s doesn’t mean it can’t happen.”

Also, officials and their lenders often refused to admit they had a debt problem until too late.

“When an accident is waiting to happen, it eventually does,” the two economists wrote in their book, titled “This Time Is Different” — the words often on the lips of policy makers just before a debt bomb exploded. “But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

In Greece, a newly elected prime minister may have struck the match last fall, when he announced that his predecessor had left a budget deficit three times as big as disclosed.

Greece’s creditors might have taken the news in stride, but in their weakened condition, they did not want to shoulder any more risk from Greece. They refused to refinance its maturing $54 billion euros ($72 billion) of debt this year unless it adopted painful austerity measures.

Could that happen here?

In January, incoming Gov. Chris Christie of New Jersey announced that his predecessor, Jon S. Corzine, had concealed a much bigger deficit than anyone knew. Mr. Corzine denied it.

So far, the bond markets have been unfazed.

Moody’s currently rates New Jersey’s debt “very strong,” though a notch below the median for states. Moody’s has also given the state a negative outlook, meaning its rating is likely to decline over the medium term. Merrill Lynch said on Monday that New Jersey’s debt should be downgraded to reflect the cost of paying its retiree pensions and health care.

In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future.

One ploy reminiscent of Greece has been the use of derivatives. While Greece used a type of foreign-exchange trade to hide debt, the derivatives popular with states and cities have been interest-rate swaps, contracts to hedge against changing rates.

The states issued variable-rate bonds and used the swaps in an attempt to lock in the low rates associated with variable-rate debt. The swaps would indeed have saved money had interest rates gone up. But to get this protection, the states had to agree to pay extra if interest rates went down. And in the years since these swaps came into vogue, interest rates have mostly fallen.

Swaps were often pitched to governments with some form of upfront cash payment — perhaps an amount just big enough to close a budget deficit. That gave the illusion that the house was in order, but in fact, such deals just added hidden debt, which has to be paid back over the life of the swaps, often 30 years.

Some economists think the last straw for states and cities will be debt hidden in their pension obligations.

Pensions are debts, too, after all, paid over time just like bonds. But states do not disclose how much they owe retirees when they disclose their bonded debt, and state officials steadfastly oppose valuing their pensions at market rates.

Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.

After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders.

“When you see that, you recognize that states are in trouble even more than we recognize,” Mr. Rauh said.

With bond payments and pension contributions consuming big chunks of state budgets, Mr. Rauh said, some states were already falling behind on unsecured debts, like bills from vendors. “Those are debts, too,” he said.

In Illinois, the state comptroller recently said the state was nearly $9 billion behind on its bills to vendors, which he called an “ongoing fiscal disaster.” On Monday, Fitch Ratings downgraded several categories of Illinois’s debt, citing the state’s accounts payable backlog. California had to pay its vendors with i.o.u.’s last year.

“These are the things that can precipitate a crisis,” Mr. Rauh said.

[macrockett]

www.washingtonpost.com/wp-dyn/content/article/2010/04/08/AR2010040801759_pf.html

Debt burden weighs on developed nations

By Howard Schneider and Anthony Faiola
Washington Post Foreign Service
Friday, April 9, 2010; A01

The debt crisis that has taken root in Greece, sparking an investor panic and talk of a national default in the heart of Europe, is at the leading edge of a problem expected to roll through the economically developed world as government borrowing rises into uncharted territory.

This mounting government debt poses a painful choice for developed countries such as Britain, Japan and the United States: either a deep reordering of public expectations about everything from the retirement age to tax rates, or slower growth as record levels of borrowing crimp economic activity.

Economists at the International Monetary Fund project that the amount of government debt held in the world's advanced economies will soon be so great that it surpasses the value of what they produce in a year.

The problem has been coming to a head in Greece, where investors Thursday dumped Greek stocks and bonds, sending the government's borrowing costs soaring and increasing the likelihood that Athens would have to request a rescue from the IMF. Cash-strapped Greece has resisted making an official request for help, fearing that an international bailout would carry with it IMF demands for even deeper austerity measures than the government has made thus far.

The situation prompted European Central Bank President Jean-Claude Trichet to reassure markets Thursday -- and in doing so to address the dramatic possibility of a government default for the first time by one of the 16 countries sharing the euro currency. "I would say that taking all the information I have, that default is not an issue for Greece," he told reporters.

Western Europe and the United States have not seen debt levels top their national output, or gross domestic product, since the years after World War II, an era when booming growth, a young population and the rebuilding of Europe gradually offset wartime borrowing.

None of those factors are at work now, as governments try to recover from a steep drop in tax revenue during the recession, a rise in spending from an economic stimulus programs, and rising pension and public health costs associated with an aging population.

The issue has moved to the top of the priority list among officials at the International Monetary Fund and in central banks and economic planning offices around the world. In the United States, where the federal government's debt has reached 84 percent of GDP, Federal Reserve Chairman Ben S. Bernanke spelled out the risks in a speech this week calling for restraint of public spending on entitlement programs.

But the same discourse is being heard across the world's mature economies, and IMF officials have begun to spell out the options -- tax hikes that might amount to as much as 3 percent of total economic output, a cap on increases in health and retirement benefits, and restrictions on spending on all other government programs.

Such aggressive changes would be politically difficult, and officials across the developed world caution that they should not begin for perhaps another year, to avoid jeopardizing the economic recovery that is taking root.

But high levels of government borrowing can drive interest rates higher, forcing businesses, households and others to pay more, curbing investment and depressing long-term economic potential.

"Unless we do something serious to fix our fiscal path -- policies that will tilt the curve downward -- you'll see these problems come forward," former IMF chief economist Michael Mussa said Thursday in a presentation at the Peterson Institute for International Economics.

Economists disagree on the level at which government debt becomes a problem. Even the amounts currently forecast -- an average of 118 percent of GDP among the world's top developed economies by 2014 -- might be sustained if countries were willing to pay the price of high interest costs and slower growth. Some see 90 percent of GDP as a point at which government debt begins to influence growth. The treaty that established the euro set a target for member governments of 60 percent -- the same level that the IMF has mentioned as a goal for developed countries to reach by 2030.

Whatever the threshold, the risks have been on display in Greece, which is now possibly heading toward the type of IMF rescue more typically associated with less developed regions of the world.

Already, the country has cut public-sector bonuses by 30 percent, frozen increases in state pensions, raised the national sales tax by two percentage points, and increased other taxes on fuel, tobacco and alcohol. But that may prove to be only an opening bid, leaving the government facing another intense round of strikes and public protests as it tries to reorder a debt that has grown to 115 percent of economic output. The country needs to roll over about $26.6 billion in debt over the next two months and now faces what may be unsustainably high interest rates.

Elsewhere in Europe, the debt issue is shaping next month's British elections. A report this week by the Bank of International Settlements warned that debt levels could explode and said that the ruling Labor Party's plan to curb the annual deficit by 1.3 percent of gross domestic product over the next three years was not enough.

Yet even the opposition Conservative Party, which has been critical of Britain's ballooning annual deficit, has avoided promising specific cuts out of concern that an immediate pullback in government spending could plunge the nation back into recession by undermining economic activity.

"The political parties have come to a consensus that they aren't going to rush to close the budgetary gap this year and will wait until next in the hopes that the recovery will be more entrenched and it will be safer to start cutting spending and raising taxes," said Martin Weale, director of the National Institute for Economic and Social Research in London.

Some nations, such as Ireland, have already moved to make steep cuts, in large part to maintain investor confidence and fend off a Greece-like crisis. Though swift action is expected to pay off in the long run, it has also kept Ireland mired in its worst recession in generations and meant across-the-board cuts in social services and public-sector pay.

"You are going to the spread of unpopular measures like these," said Nicolas Veron, senior fellow at Bruegel, the Brussels-based economic think tank. "Not all fiscal consolidations will be alike, but it is clear that the situation has been worsening in many nations since the beginning of the crisis and there is no way they will get back to normal levels without putting forward difficult and unpopular measures."

Faiola reported from London.

www.oecd.org/dataoecd/15/2/42252266.pdf Better read this pdf on early warning signs a sovereign is going over the edge...namely bond spreads primarily.