An economic health indicator just flashed yellow
The capital city of a rich Blue state is begging for a bailout from the state legislature because bankruptcy is imminent. The problem is, the state has its own budget issues to deal with…
Most liberals do not believe that governments must follow the same principles of sound and responsible budgeting that businesses and individuals must follow. Where the individual or the family knows quite clearly the dangers of consumer debt and its power to turn on them at a moment’s notice and wipe them out, it is as if governments think they have charmed this slippery viper.
While businesses that indulge in debt-fueled rapid growth and expansion during the boom times are the most likely to fall victim to bankruptcy during economic downturns, liberals think governments are not bound by the same financial limits.
REALITY IS HITTING THE FAN
But now, the rug is being pulled out from under them. Hartford, Connecticut, has sounded an alarm:
Hartford officials said Thursday it will likely file for bankruptcy in 60 days unless Connecticut provides help for the cash-strapped capital city in the midst of a fiscal emergency.
City officials warned Gov. Dannel Malloy, a Democrat, and state lawmakers that Hartford, which has a deficit approaching $50 million, wouldn’t be able to pay all of its bills within 60 days. Hartford officials said it would file for bankruptcy at that point unless the state legislature passes a budget that gives the city more funding or otherwise provides it with more cash.
“We face the greatest fiscal crisis in our city’s history,” officials said in a letter signed by Mayor Luke Bronin, Treasurer Adam Cloud and Thomas Clarke II, president of the court of common council.
Hartford is strapped for cash. The reason?
Pensions, healthcare, and debt obligations. Political promises that it can no longer keep. The city politicians have been playing hot potato, kick the can, and musical chairs for a very long time. Now, the music is about to stop. The can has gotten too heavy to kick.
Rising fixed costs for health care and pensions have been driving Hartford’s fiscal challenges. The city is on the hook for nearly $180 million in payments for debt service, health care, pensions and other costs for the current fiscal year. That is more than half of the city’s budget, excluding education.
Hartford’s officials said the city has a debt problem. The city said its law firm of Greenberg Traurig LLP will engage in negotiations with its bondholders and asked the state for its support.
The city is incapable of cutting services much further than it already has. It is backed up against unmovable pension, health care, and debt liabilities. So it’s asking for a bailout from the state legislature. Problem is, the state is up to its eyeballs in debt, too. The legislature can’t even get a budget plan passed. The state has already had to cut spending to other cities and towns across the state.
THE STATE IS BATTLING ITS OWN ALLIGATORS
The state of Connecticut itself is facing its own fiscal challenges and has yet to pass a budget for the current fiscal year that would close a $3.5 billion spending gap. Since July 1, state operations have been funded by an executive order signed Mr. Malloy that has slashed funding for cities and towns across Connecticut.
Democratic Speaker of House Joe Aresimowicz said Wednesday he planned to call for a vote on the budget on Sept. 14 even though lawmakers have yet to reach a consensus on a spending plan. It is unclear if there will be enough votes in both chambers to pass it.
Connecticut is one of the richest states in the nation, and its pension obligations are unfunded by about 48%, which makes it one of the worst-prepared states in the country. The state has a total pension liability of about $55 billion, which is unfunded by approximately $27 billion.
And this is in spite of the massive stock market growth achieved over the last few years. The economic recovery has been the most lackluster on record. How are things going to look when the next recession hits?
Will the state bail out Hartford, or is the city going to stiff its retirees by shedding its pension debt in bankruptcy?
To fund Hartford, the state will have to take money away from somewhere else. This will be visible. Other cities will ask why Hartford gets special treatment and they don’t. This is the kind of decision that states across the country will increasingly face as time goes on.
Politicians hate to be in this position. They don’t want to be the one to gore the ox. They know it will probably be the end of their political career. So they are praying for a bailout from above.
HIERARCHY OF BAILOUTS
The cities are looking for bailouts from the states. The states are in massive debt of their own, and they will be looking for bailouts from the Federal Government.
The Federal Government is fundamentally different in that it has control over the money supply. It can sell more and more bonds. The Federal Reserve will print money out of nothing to buy them if no one else will.
But at some point, even the Federal Government’s chickens will come home to roost. It is saddled with its own unfunded liabilities that total $210 trillion dollars, as calculated by Professor of Economics and Harvard graduate Laurence Kotlikoff. That’s the amount that the federal government needs to put in a bank at about 5% interest to meet its Social Security and Medicare obligations.
Ain’t a government in the world’s got $200 trillion lying around to stick in the bank.
The music might be coming to a halt for the cities, but this game is just getting started.
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