ECONOMIC ANALYSIS:

Thinking About the States

"Too big to fail"? Hmm...what about a whole state?

I’ve been thinking about “the big five” states, unpaid bills, money, and prisons—specifically the Thomson facility here in Illinois. I can’t help but think how our multiple financial messes are getting a pass in current news coverage because of St. Nicholas coming to town... plus the fact that the politicians feel what isn’t being openly and notoriously discussed will not hurt them. It is a classic case of no news (covered in the media) is good news (for them).

You see, all but about four of the 50 US states are in major financial trouble. Their revenue streams have declined far more than we are being told—while expenses have risen. Deficits on the Federal, State, County, and community levels continue to grow hourly. Any good news is relative to what other governmental entities elsewhere owe. The accounting tricks of the governmental trade are legion. The most prevalent game played is using “cost basis accounting” as opposed to “comprehensive accrual accounting.” Under the cost basis accounting method, revenues are only recognized when received, while expenses are only recognized when actually paid. If there is no money in the governmental coffers, the bills wait to be paid. Rarely do states, counties, and communities make public what is owed and outstanding. There are no "accounts receivable" or "accounts payable." This is understandable in this age of outstanding payables; the amounts states owe would literally shock the public.

Until just recently Illinois was considered in the “baddest of the bad." Under our State Constitution, we are required to have a balanced budget. What a joke! We presently have over $90 billion in unpaid bills. Roughly 94% of that is for unfunded pensions for the teachers and the IMRF (Illinois Municipal Retirement Fund). The next biggest chunks are owed to hospitals and nursing homes for Medicaid patients. These medical payments are about two years in arrears—and growing rapidly. Illinois has not made any such payments since October 2008!

When a few minor news stories were leaked out after Governor Blagojevich was booted out of office for “allegedly” trying to sell the vacated US Senate seat of Barack Obama, the guess-timates of Illinois payables were put at over $60 billion. Every time a new figure is made public, that figure grows by several billion motr. But then... with our former governor now awaiting trial, the attitude in Springfield appears to be, come clean and dump all the deficits, debt and payables at Blagojevich's feet! Well, trust me: there is plenty of blame to go around. This didn’t just also happen in the past few years.

I figure that Illinois joins California, Michigan, New York, and Florida as the “big five” states with major financial problems.

Illinois' raising the state income tax from 3% to 5.5% would only generate half of what is needed to cover current deficits—not including the arrears in pensions and medical services. Revenues from the income taxes, gaming, user fees, vehicle licensing, etc. continue to decline.

State deficits are a national problem that will not be acknowledged until a major state is forced into bankruptcy. As a CPA with considerable governmental experience, I feel that the only reason we have not seen a state (or even major city) bankruptcy is because the major accounting and law firms are not certain how to even do one. How would one play out? Remember that when Chrysler had their problems in the early 1980’s (minuscule by comparison to problems and amounts now), their audited financial statements did not even carry the traditional opinion wording for a going concern. "Too big to fail"? Hmm...what about a whole state?

Illinois has talked about selling off assets to cover its bills. The sale of the $100 million correctional facility at Thomson, Illinois (built and left unused since 2001) to Uncle $ugar to incarcerate the so-called Al-Qaeda bad boys from Guantanamo, Cuba, and military bases around the planet for $240 million would come as a God-send for the northwestern corner of Illinois. The Federal payroll would be considerable for the opening of the Thomson facility. Presently, the annual costs for a prisoner at a minimum security prison are $45,000 per inmate per year. It is being argued that bringing a terrorist “storage” facility to the Land of Lincoln might paint a bull’s eye on the state, but I'm not so sure about that.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.