US Financial Crisis: 46 States Could Face Bankruptcy In 2010

Michael Panzner
updated | Author's Website

In the 1993 comedy, Groundhog Day, Bill Murray plays an egocentric weatherman who suddenly finds himself condemned to repeating one of his least favorite days over and over again.

With municipal finances rapidly emerging as the next debacle-in-the-making in the still unfolding financial crisis, as noted by Adrienne Gonzalez in a post at her Jr Deputy Accountant blog, “46 States Could Face Bankruptcy in FY09/FY10,” the bailout-meisters must be feeling like they, too, are stuck in an endlessly repeating nightmare – only without the laughs.

According to the Center on Budget and Policy Priorities, California isn’t the only state in fiscal hot water. In fact, 46 states could find themselves bankrupt and destitute by the end of fiscal year 2010.

States are currently at the mid-point of fiscal year 2009 – which started July 1 in most states – and are in the process of preparing their budgets for the next year. Over half the states had already cut spending, used reserves, or raised revenues in order to adopt a balanced budget for the current fiscal year – which started July 1 in most states. Now, their budgets have fallen out of balance again. New gaps of $51 billion (over 10% of state budgets) have opened up in the budgets of at least 42 states plus the District of Columbia. These budget gaps are in addition to the $48 billion shortfalls that these and other states faced as they adopted their budgets for the current fiscal year, bringing total gaps for the year to 15 percent of budgets.

The states fiscal problems are continuing into the next two years. At least 45 states have looked ahead and anticipate deficits for fiscal year 2010 and beyond. These gaps total almost $94 billion – 16 percent of budgets – for the 36 states that have estimated the size of these gaps and are likely to grow as gaps are re-estimated in the next few months.

TABLE 1:
STATES WITH MID-YEAR FY2009 BUDGET GAPS

Size of GapPercent of FY2009 General Fund
Alabama$1.1 billion12.7%
Alaska$360 million6.8%
Arizona$1.6 billion15.9%
California$13.7 billion13.6%
Colorado$604 million7.7%
Connecticut$1.7 billion10.1%
District of Columbia$258 million4.1%
Delaware$226 million6.2%
Florida$2.3 billion9.0%
Georgia$2.2 billion10.3%
Hawaii$232 million4.0%
Idaho$218 million7.4%
Illinois$4.2 billion14.8%
Indiana$1.1 billion8.0%
Iowa$134 million2.1%
Kansas$186 million2.9%
Kentucky$456 million4.9%
Louisiana$341 million3.7%
Maine$140 million4.6%
Maryland$691 million4.6%
Massachusetts$2.4 billion8.4%
Michigan$200 million0.9%
Minnesota$426 million2.5%
Mississippi$175 million3.4%
Missouri$342 million3.8%
Nevada$536 million7.3%
New Hampshire$50 million1.6%
New Jersey$2.1 billion6.5%
New Mexico$454 million7.5%
New York$1.7 billion3.0%
North Carolina$2.0 billion9.3%
Ohio$1.2 billion4.2%
Oregon$442 million6.6%
Pennsylvania$2.3 billion8.1%
Rhode Island$372 million11.4%
South Carolina$871 million12.7%
South Dakota$27 million2.2%
Tennessee$884 million7.8%
Utah$620 million10.4%
Vermont$66 million5.4%
Virginia$1.1 billion6.7%
Washington$509 million3.4%
Wisconsin$594 million4.2%
TOTAL$51.1 billion10.5%
Note: An entry of “DK” in Size of Gap means that an estimate of the size of the projected gap in that state is not yet available.

Again, I’m no mathlete but those numbers look slightly frightening.

Some states have not been affected by the economic downturn but the number is dwindling. There are a number of reasons why. Some mineral-rich states – such as New Mexico, Alaska, and Montana – saw revenue growth as a result of high oil prices. However, the recent decline in oil prices has begun to affect revenues in some of these states. The economies of a handful of other states have so far been less affected by the national economic problems.

In states facing budget gaps, the consequences sometimes are severe – for residents as well as the economy. Unlike the federal government, states cannot run deficits when the economy turns down; they must cut expenditures, raise taxes, or draw down reserve funds to balance their budgets. As the current fiscal year ends and states plan for next year, budget difficulties are leading some 40 states to reduce or propose reductions in services to their residents, including some of their most vulnerable families and individuals.

And the verdict? States are on their own on this one. The federal government has its own printing press, what do the states have?

Not a damn thing, obviously.

California, Arizona, and Kansas have already openly expressed concerns over budget shortfalls, going so far as to threaten mass state employee layoffs and delay tax refund checks – which domino shall fall next?

Makes sense then that the states would be out to reclaim their sovereignty.

Head for the hills, kids. And I don’t mean Hollywood.

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