WASHINGTON (Reuters) - The recession that began in 2007 created budget emergencies in almost all U.S. states and in many cities and counties, spotlighting deeper, long-standing fiscal problems.
Members of Congress are now worrying publicly that the only solution will be a sweeping federal rescue -- one that Washington can barely afford under the burdens of its own massive deficit.
Analysts, taxpayers and investors in the $2.9 trillion municipal bond market have begun to worry about possible consequences of the budget crises.
Below are the top threats to the economies of state and local governments and to those who buy and trade their debt.
Of the longer-term problems, none looms as large as underfunded pensions and other post-employment benefits for public employees.
The issue has boiled over in Wisconsin and other states where Republicans were recently elected as governors and state legislators. Public workers and Democrats are opposing moves to curb union rights and cut employee benefits.
All three major rating agencies are giving greater scrutiny to how pension obligations affect states’ credit-worthiness, and the U.S. Securities and Exchange Commission has rapped New Jersey for not properly disclosing its low pension funding levels.
No one can say for certain the extent that states with economic woes have underfunded their pensions and other benefits, such as healthcare, promised to retired employees. Estimates for states’ pension under-funding range from $700 billion to $3 trillion because of disparities in calculating future returns on investments made by pension systems.
Last year, the Pew Center on the States put the total shortfall at $1 trillion. That estimate relied on data from before the financial crisis. An updated report is due April 26.
In recent years, the Governmental Accounting Standards Board has required states to put promises made to retirees outside of pensions on their books. But these “OPEBs” are easier to change than pensions and could provide places for states to cut.
Some Republican members of Congress are considering legislation that would allow states to declare bankruptcy, which they cannot do now because the U.S. Constitution recognizes them as sovereign governments. Bankruptcy would allow states to sort out their finances in federal courts and renege on pension promises. States led by both Republicans and Democrats roundly oppose such a bold move, saying it would raise borrowing costs and do little to help their situations. The chances that any bill will make it through Congress and become law are small.
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The housing crisis, financial meltdown and recession reduced nearly all revenue sources for states, cities and counties. The National Governors Association and National Association of State Budget Officers have dubbed the revenue decline a “collapse.”
Of late, states began to see improvements in their revenue collections. But so far the increases have been modest and revenue has yet to return to levels reached before the recession. Moreover, some of the recent revenue rise came from tax hikes, and taxpayers are showing little appetite for further increases.
All states, except for Vermont, and many cities and counties must end their fiscal years with their budgets balanced. To make up for less revenue, many governments were forced to cut spending. Looking ahead, they have fewer areas to adjust if revenue remains soft.