California and New York, Two AIGs
This article in the NY Times is interesting in that it shows that for all the chatter about how big business cannot be trusted, neither can government. For those of you who haven’t been paying attention to California, New York or other states suffering serious budget issues, there are indeed some amazing parallels between what many of financial institutions did and what the states are doing right now.
This first one I haven’t heard of too many businesses doing, taking money that really doesn’t belong to the state,
New Hampshire was recently ordered by its State Supreme Court to put back $110 million that it took from a medical malpractice insurance pool to balance its budget. Colorado tried, so far unsuccessfully, to grab a $500 million surplus from Pinnacol Assurance, a state workers’ compensation insurer that was privatized in 2002. It wanted the money for its university system and seems likely to get a lesser amount, perhaps $200 million.
Some states are altering accounting rules. Must be real handy to be able to change the rules when the rules become a problem,
Connecticut has tried to issue its own accounting rules. Hawaii has inaugurated a four-day school week. California accelerated its corporate income tax this year, making companies pay 70 percent of their 2010 taxes by June 15. And many states have balanced their budgets with federal health care dollars that Congress has not yet appropriated.
Unstated, or “off the books” debt. This is one of the things that brought down Enron; hiding debt and losses in companies not affiliated with Enron to make the balance sheet look better,
California’s stated debt — the value of all its bonds outstanding — looks manageable, at just 8 percent of its total economy. But California has big unstated debts, too. If the fair value of the shortfall in California’s big pension fund is counted, for instance, the state’s debt burden more than quadruples, to 37 percent of its economic output, according to one calculation.
Is Jeffrey Skilling out of prison? I think he has a job to do in California. See when a corporation does it, it is bad, but when a government does it, is is wise leadership.
And of course, we can’t forget about credit default swaps,
In fact, New Jersey and other states have used a whole bagful of tricks and gimmicks to make their budgets look balanced and to push debts into the future.
One ploy reminiscent of Greece has been the use of derivatives. While Greece used a type of foreign-exchange trade to hide debt, the derivatives popular with states and cities have been interest-rate swaps, contracts to hedge against changing rates.
The states issued variable-rate bonds and used the swaps in an attempt to lock in the low rates associated with variable-rate debt. The swaps would indeed have saved money had interest rates gone up. But to get this protection, the states had to agree to pay extra if interest rates went down. And in the years since these swaps came into vogue, interest rates have mostly fallen.
What is causing the biggest issues? State pension plans which tend to be quite generous defined benefit plans.
Pensions are debts, too, after all, paid over time just like bonds. But states do not disclose how much they owe retirees when they disclose their bonded debt, and state officials steadfastly oppose valuing their pensions at market rates.
Joshua Rauh, an economist at Northwestern University, and Robert Novy-Marx of the University of Chicago, recently recalculated the value of the 50 states’ pension obligations the way the bond markets value debt. They put the number at $5.17 trillion.
After the $1.94 trillion set aside in state pension funds was subtracted, there was a gap of $3.23 trillion — more than three times the amount the states owe their bondholders.
“When you see that, you recognize that states are in trouble even more than we recognize,” Mr. Rauh said.
And as the article notes, problems with default and financial crises can develop even over surprisingly small amounts of debt,
One finding was that countries “can default on stunningly small amounts of debt,” he said, perhaps just one-fourth of what stopped Greece in its tracks. “The fact that the states’ debts aren’t as big as Greece’s doesn’t mean it can’t happen.”
I find it quite amusing that so many are outraged at what happened on Wall Street and often state that better regulations…indeed better government is the answer, and when we look we see that governments at the state level are doing the exact same things Wall Street did.
So, we are coming out of the storm from the financial meltdown of 2008/2009 just in time for the next meltdown to hit in the form of state budgets. But don’t worry, the states have the power to tax so its not really a problem at all…just like the Federal government had the power to tax and could give vast sums of money to companies like AIG, Citigroup, and others.