Demagoguery and deranged shootings in Arizona have diverted national attention from the looming threat of municipal bond defaults. Municipal bond defaults and state and local government bankruptcies go hand-in-hand. This danger was identified months ago, by Meredith Whitney, in a report "Tragedy of the Commons: Launching Ratings on the Top 15 States". The report's premise is that some state governments will soon have difficulty funding transfers to local governments, and, given current out-of-control spending, approximately 100 municipalities will likely default. On a scale of one to ten, we should count this threat as a level 10 problem and start ringing the alarms.
Municipalities rely heavily on property and sales taxes to operate. But, with the currently high unemployment, with the housing market under water and the number of foreclosures continuing to grow, the sources municipal revenue are shrinking while spending continues to grow. Some municipalities and states have conjured up innovative smoke and mirrors strategies to disguise the budget gap by borrowing more and shifting costs forward to disguise the problems from voters. But even the best of jugglers can keep only so many balls in the air simultaneously without crashing.
One solution to resolving escalating municipal budget gaps will require states to immediately implement drastic programmatic changes and government job cuts. Federal, state and local government officials know this, but they also know that budget cutting is hard and usually unpopular. Self-indulgent politicians, over the course of decades, have implemented overly generous increases to pension plans, union labor agreements, Medicare and welfare entitlements, essentially to buy votes.
Payment is now due for that unwise largess. Unfortunately, the states and municipalities facing the most immediate risks of default, such as California, Michigan and Illinois, are home to entrenched Democrat politicians that seem to lack the ability and courage to inform voters that these overly generous benefits are unsustainable.
For example, in California, which tops the list of irresponsible states, where spending outdistances its tax revenues, Jerry Brown, responsible for implementing much of the labor union pandering and entitlement increases that have driven California to the brink of bankruptcy, has been re-elected governor. Will Governor Brown have a moment of epiphany and tell Californians that he must now move to cut the very programs and special interest groups that he has supported for decades? I don’t think so.Instead, it is a safe bet that at the 11th hour, when the threat of municipal and state bond defaults is imminent, California will come to the federal government and seek a bailout of almost $1 trillion. After all, this ploy worked before, as much of the Obama stimulus money went to support those states that have been most fiscally irresponsible.
Will a new GOP-led Congress make the same mistake and backstop irresponsible states and municipalities who are simply unwilling to balance their books, and make the necessary cuts to long-cherished, ineffective programs that cannot be sustained? That great question will dominate the national debate over the next year.
Fed Chief Ben Bernanke thinks so too, which is why he took the unusual step of warning cash-strapped municipalities and states they cannot depend up the Federal Reserve to bail them out. I'd bet that Democrat mayors and legislators for near-bankrupt states, such as California, Illinois and Michigan paid little attention to Bernanke’s warning, believing that the old game of bailouts is still afoot. They have not yet accepted that the cupboard is bare, both of taxpayer funding and taxpayer tolerance of bad fiscal decisions. More to the point, they doubt Republicans mean what they say and hope that Republicans blink when confronted with the problem.
What Democrats will seek, and what Republicans must now prevent, is a huge transfer of national wealth and taxes from those States that have been prudent, limiting government growth, rejecting the pernicious demands of state employees and unionized teachers, and fostered a pro-growth economy by limiting taxes and unwise regulation.
Why should states such as Texas, Alaska, North Carolina and Virginia be forced to pay for the sins of California, Michigan, and Illinois? Remember: the original Rick Santelli rant that gave birth to the Tea Parties epitomized the growing discontent of an increasing number of American taxpayers who objected to individual wealth transfers from those who have been frugal to those who were spendthrift, buying houses they could not afford. This increasingly vocal population of discontented working Americans is one of the major forces that overturned the Democrat-led House of Representatives. And, they haven't gone away just because the election is over.
The House, and the Senate of the 112th Congress should signal the new resolve in Washington to limit spending and echo Bernanke's statement that there will be no federal aid for state and local governments operating in the red.
Under GOP leadership, the House could go even further and issue a "Sense of the House" resolution making it clear that no additional "stimulus" or "bailout" funding will be forthcoming, and that municipalities need to make cuts and get their budgets balanced.
Now is not the time for the GOP-led House to be squeamish. All Americans are watching them to see if their actions will mirror their election campaign promises. One thing's for sure, legislators need to read the writing on the wall of American taxpayer discontent, because if they don't, come 2012 …