Remember California IOUs? Other states are starting to face budget realities as well. Reliance on easy credit and credit related tax revenue created a spending momentum (bordering on criminal) that's about to hit a wall. Debt maturities are looming.
NY Times: Without a budget deal, New York will be left with just $36 million in the bank by the end of December, according to current projections.
The state muni CDS markets are starting to widen, as reality sets in. In the chart below we exclude California and Michigan, as their problems have already been well publicized.
State financing is relatively simple. Many states can not run deficits by law, and even those who can will end up paying increasingly wider spreads. The two remaining choices are raising taxes or cutting budgets. Raising taxes only works on the so-called "wealthy" (as NY did in April), otherwise there will be a revolt in this environment. The "wealthy" in states like NY have enough mobility to simply move to other states, reducing tax receipts to the state further. And even if they don't, the impact of such tax hikes is generally insufficient to move the needle. Tax hikes also damage businesses and reduce hiring.
That leaves spending cuts. But employees of many states have significant influence over state politics, including influence over governors and state legislators. Those politicians who cut budgets - particularly if they cut state jobs - will simply not see another term. New York's Paterson for example knows he will not get reelected, so he has the guts to do the right thing and implement the cuts. The legislators however will fight him on this to the last minute. Other states will hit this wall soon as well, and more state IOUs (instead of cash) are sure to follow.
SoberLook.com
