COMMENTARY: Probe of 1 state shows why agencies worry about muni minefield

By   /   April 5, 2012  /   No Comments

By Frank Keegan | State Budget Solutions

How deep into debt have state and local politicians plunged taxpayers? Nobody really knows. The U.S. Securities and Exchange Commission is trying to find out, but a probe of just one state, Arizona, by investigative reporter Mark Flatten of the Goldwater Institute found at least $66.5 billion.

That’s more than $10,000 for every child, woman and man in a state running chronic deficits and additional billions in other hidden unfunded liabilities.

Flatten details how politicians got around legal limits on public debt and enriched a clique of insiders who do the deals. Now taxpayers are stuck with the bill.
Exactly how citizens and businesses nationwide blighted by economic catastrophe are going to pay government pensions, bondholders and health-care costs as well as feed the insatiable spending of politicians is, according to a report released Thursday by the Government Accountability Office, a “challenge.”
The GAO “State and Local Governments’ Fiscal Outlook” update shows that “The fiscal position of the (state and local government) sector will steadily decline through 2060 absent any policy changes.”
How steep is that decline? Slippery slope to bankruptcy and getting steeper every year despite massive tax hikes and revenue increases.
According to the GAO team, “We calculated that closing the fiscal gap would require action to be taken today and maintained for each year (through 2060) equivalent to a 12.7 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action on that side of a similar magnitude.” 
Less than two years ago, GAO calculated the overall cuts or tax increases every year at 12.3 percent, so the fiscal death spiral accelerated at a rate higher than inflation.
And in both studies GAO did not include the total real debt, because state and local politicians hide it.
So how exactly are taxpayers supposed to make all these bonds and other debts good when, at 12.7 percent, states would have to double tax revenue every 5.7 years just to pay the bills? How can governments pay all the debts while cutting services at that rate every year?
The answer is they cannot. Something has to give. And that is going to get ugly.
If all municipal bondholders believe those munis are a sure thing, they should check the Financial Industry Regulatory Authority “Municipal Bonds — Staying on the Safe Side of the Street in Rough Times” Web page:
“Do your homework. Before buying any municipal bond, carefully consider the financial condition of the state, city or county that is issuing the bond and any other party that is responsible for payment on the bond. For revenue bonds, ask whether the issuer’s revenue has been enough to cover the payments it must make on the bond ….”
The only problem with that is under current standards for state and local government accounting and reporting, it’s virtually impossible to find out how deep in debt any state or local government really is.
An SEC “Investor Bulletin: Focus on Municipal Bonds,” clearly warns, “As with any investment, investors who buy municipal bonds face a number of risks, ….” and provides information and links investors can use to find out what some of those risks are and how big they might really be.
But it does not provide any guidance for taxpayers who need to know how big a tab politicians have run up or how to pay for it.
That task is left to the dwindling number of reporters like Flatten, and experts at the institute who offer “Recommendations for Reform.”
Read it and weep, citizens. Then start pushing for reform in your states, counties, cities and towns.
Frank Keegan is editor of a project of The State Budget Solutions Project is non-partisan, positive, pro-reform, proactive and anchored in fundamental-systemic solutions. The goal is to successfully engage political journalists/bloggers, state officials and opinion leaders in a new way of thinking about state government and budgets, fundamental reforms, transparency and accountability. [email protected]