By Frank Keegan _ Two reports highlight government fiscal crisis from around the world to city hall. GAO: State and local fiscal gap $9.9 trillion. Morgan Stanley report: 'Ask not whether governments will default, but how.'

Government bondholders, look out. The catastrophe is universal.

Two reports — one global, the other state and local – focus on harsh economic realities that question sovereign ability to pay.

According to the Government Accountability Office, “The obligation of state and local governments to repay their long-term debt also varies, and a substantial portion of that debt has limited claims on the assets and revenues of state and local governments ….”

In his first Sovereign Subjects newsletter for Morgan Stanley & Co., economist Arnaud Marès says of governments around the world, “The question is not whether they will renege on their promises, but rather upon which of their promises they will renege, and what form this default will take.”

Pointing out that bondholders so far have been the only constituents to not suffer in the recession, he says, “Investors should be prepared to face financial oppression, a credible threat against which current yields provide little protection.”

First the bad news: State and local governments are heading off a fiscal cliff, and the federal government cannot catch them when they fall.

GAO-10-899, says emphatically:

“… closing the fiscal gap over the next 50 years would require action to be taken today and maintained for each and every year going forward equivalent to a 12.3 percent reduction in state and local government current expenditures. Closing the fiscal gap through revenue increases would require action of a similar magnitude ….”

Repeat this: “require action to be taken today.”

Marès reports globally: “What raises questions about debt sustainability is not so much current debt levels as the additional debt that will accumulate in coming years if policies do not radically change.”

Repeat: “if policies do not radically change.”

Worse news: According to GAO’s Susan Etzel, the study “drew heavily on earlier work,” and “did not do original analysis.” That means GAO only studied old false official data states and municipalities use to hide the catastrophe.

And Marès reports, “The exact size of the structural deficit is a guesstimate at best ….”

Worst news of all — especially for politicians trying to blame all this on the recession — the GAO study says: “Because this report focuses primarily on long-term pressures and some of the state and local data on government spending were only available through 2007, the effects of this recession are not included ….” 

Marès affirms the effect of the recession is transient. Long-term structural spending “is the part of the deficit that will remain – once temporary stimulus measures are withdrawn and growth has returned to trend ….”

Here at home and around the world, politicians have made promises they cannot keep to citizens, public employees and bond holders.

According to Sovereign Subjects, widespread loss is inevitable. “… some or all … stakeholders must suffer a loss: either taxpayers (through a higher tax burden), or beneficiaries of public services (through lower expenditure) or bond holders (through some form of default).”

Marès warns, “Bond holders have been fully sheltered from loss through the Great Recession – so far,” but necessary immediate government austerity measures are politically “conditional on the perception that the cost of fiscal retrenchment would be distributed fairly across constituencies ….”

Now for the good news: There is no good news.

Both GAO and Marès put most of the blame on aging populations and government promises for pensions and health care. But there are other entrenched factors ranging from deferred capital projects to risky financial deals to accounting tricks.

State and local leaders, who run governments with the most direct immediate impact on citizens’ daily lives, deferred trillions of dollars in expenses for at least a decade.

The recession that began in December 2007 merely exposed fundamental rot like an ebb tide reveals crumbled pilings.

Bottom line is the next 50 years cannot be anything like the last 50, when, according to a study by the Mercatus Center at George Mason University, “aggregate state and local spending grew 34 percent faster than the private sector …. From 2000 to 2009, state and local government spending grew nearly twice as fast as the private sector ….”

The fact is state and local governments are taking more money from citizens right now than the record highs of just three years ago, but they cannot control spending.

According to Marès, realistic government response around the world is “a function of the people’s tolerance for taxation and government interference.”

That tolerance is running low in America, especially at the state and local levels where taxpayers can swing and hit.

We shall swing and hit any politicians who fail to make radical changes now.

Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com . frank.keegan@franklincenterhq.org