Out of Money, No Problem, Borrow More

Thursday July 15, 2010

On the markets blog and in previous entries here we have discussed the fact that states and cities in the US are out of money. I guess that this fall will be time's up what are they going to do. Sure enough, Illinois

plans to float pension obligation bonds to fund, yes, current pension obligations. This is insane. If the pension obligation cannot be met, piling on more debt will just make the final reckoning worse. We will study pension obligations in Intermed IIl. With a flat stock market for ten years and fewer workers coming on line, the assumptions of pension fund earnings were not met, but of course everyone wants their pension check. What to do?  Well, selling debt and hoping things get better is hardly a solution. Stay tuned, our guess is that if there is another financial meltdown this fall, it will start with such unfunded obligations.

I just ran across these state updates on Mish's Global Economic Analysis site, see sidebar for link. As he says, how is it that the municipal market is staying steady with this stream of unfunded debt?  The answer is that retirees, eager for yield, are emptying their safe bank accounts to venture into the debt market. We suspect, as we said above and Mish says today, that this will end badly this fall. Remember NYC in 1976, imagine the New York City default of 1976, everywhere.....

Illinois let $5 billion of bills go unpaid.

Minnesota is delaying corporate and sales-tax refunds, postponing school and medical aid and setting up a $600 million bank line of credit.

New Jersey is planning to refinance about $250 million of general-obligation bonds to push $202.5 million of debt-service costs into future fiscal years.

Illinois, is selling $900 million of bonds for capital projects this week.

22 states put staff on temporary leave.

Arizona sold its House of Representatives and Senate buildings.

California solicited bids for 11 of its office complexes.

Delaware saved $29,000 by eliminating flowers at the state psychiatric hospital and health department.

California Governor Arnold Schwarzenegger, facing a $19 billion budget deficit for the year that began this month, is trying to force 200,000 state workers onto minimum wages temporarily.