State Finance Directors Warn of More Trouble Ahead



By SARA MURRAY Michigan and California are likely to face a fresh round of budget woes when federal stimulus funds used as a fiscal crutch dry up, finance directors for the states said Friday.



Short-term budget gaps have battered states as revenues plummeted during the recession. Aided by about $250 billion in funds from the stimulus package expected through the end of next year, states managed to close the gaps this year. But both finance directors, speaking at a Pew Center on the States event in Washington, were pessimistic about their states' futures beyond fiscal 2011.



"We're facing a cliff in 2011 when stimulus dollars run out," said Mitchell Bean, director of the Michigan House Fiscal Agency. "There is not an end in sight, even in recovery."



As of July 2009, California's budget shortfall was 49.3% of its general funds. States have considered drastic options to fill such gaps.



"I looked as hard as I could at how states could declare bankruptcy," said Michael Genest, director of the California Department of Finance who is stepping down at the end of the year. "I literally looked at the federal constitution to see if there was a way for states to return to territory status."



There were no bankruptcy options, and the legislature chose to cut back sharply on education and health care to fill the gap. Mr. Genest already predicts the 2011 shortfall will outpace the projected $7 billion gap. It is a smaller deficit than this year's gap, but the choices will be more difficult because so many cuts have already been made.



Mr. Genest estimated that, eventually, 40% of the state's budget would go to the state Medicaid program, 40% to education, 10% to debt service and 6% to retiree medical services and pension—leaving little left for anything else, such as the state's corrections system.



Mr. Bean described a similarly depressing scenario for Michigan, which could end the recession with 25% fewer jobs than in June 2000 and a total of one million job losses. Michigan's unemployment rate in September was 15.3%.



He suggested that strict term limits often lead to political gridlock that prevents large-scale changes, such as overhauling the tax code so it is broad-based with lower tax rates. Mr. Bean said lawmakers will likely have to trim the budget at least 12.5% this year after closing a $2.8 billion gap last year.



"Citizens don't quite understand yet the implications of some of the cuts that we've made," Mr. Bean said. "A lot of it has fallen on local governments. I am very concerned that we're going to have a lot of insolvencies in local governments."

Derivatives Reform Bill Written By Someone 'Inside The Banks'



Michael Greenberger, a University of Maryland law professor and veteran federal regulator, studied the House committee's 187-page bill and detected the fine needlework of Wall Street lawyers. "It had to be written by someone inside the banks," Greenberger said, "because buried every few pages is a tricky and devilish 'exception.' It would greatly surprise me if these poison pills originated from anyone on Capitol Hill or the Treasury." A well-informed Congressional source confirmed that the original language in the draft legislation was written by financial-industry experts. It "was probably written by JPMorgan and Goldman Sachs," he told me, "and possibly the Chicago Mercantile Exchange."

It would seem that we’re headed into an area that the rule of law does not cover… namely that of individual states going bankrupt. It’s not happened before, the Constitution does not address it, nor does any other set of laws. So, will the Fed step in and bail the states out? Of course they will, they already are, just not enough to save them yet. The real question, of course, is who bails out our nation? Any way you slice it, ultimately it’s going to be you and I, and I’m going to have a lot to say on that subject, because my preferred way of doing so will not look anything like the central bankers have planned, that’s for sure.Scary article really, we are going to face a tough road ahead:As usual, tons of real problems with no real answers to be found. That’s because real answers don’t exist in the boxes presented to you. Watch “The Secret of Oz” and get ready for some real answers to flow your way.Oh, and here's a snipet from a terrific example of business as usual...There you have it, how laws are really written in America. Any law written in a competent manner, such as Ron Paul's Audit the Fed bill wind up so gutted that they become completely meaningless, or worse, even more dangerous, like the bank "stress tests" that are designed to enhance perception only and leave the sheep with a false sense of security. There is obviously a better path forward for America, we need to get to work.