Fiscal Pandemic Infects Governments, Here and Abroad
July 2009
SAN FRANCISCO, CA --- Even putting aside the projected $1.8 trillion U.S. federal deficit (a more precise projection due in August), a fiscal pandemic is infecting local and state governments, and most Western countries.
Severe government downsizing is becoming the only known cure.
The California budget crisis received maximum media exposure. But at least 33 states anticipate deficits for 2011, reaching a total of $51 billion. Combined budget gaps for the next two years — state fiscal years 2010 and 2011 — are estimated to total at least $350 billion (from the Center on Budget and Policy Priorities).
Whether it’s San Francisco or California, a main culprit remains gold-plated pension benefits. It brought down [CompanyWatch allows you to receive email alerts with stories related to your companies of interest. <p>You can watch up to ten companies at a time.</p>] General Motors, and until faced squarely and honestly, it haunts municipalities and states.
The poster child for absurd benefit packages is Bruce Malkenhorst, a retired city manager near Los Angeles who collects $500,000 a year in benefits. Then there’s James Stahl, who worked for the Los Angeles County Sanitation District and receives $265,000 a year (California Foundation for Fiscal Responsibility). Granted, most pensioners receive modest benefits. But add lifetime full health benefits including for spouses – as in San Francisco – and it’s clearly unsustainable. In addition, pension fund losses mean the employers will have to dip into their own budgets to pay the promised pensions.
And that means cuts, significant cuts in services and of government employees. It’s already happening around the country.
The cuts enacted in at least 39 states are occurring in all major areas of state services, including health care (21 states), services to the elderly and disabled (22 states), K-12 education (24 states) and higher education (32 states).
The worst is yet to come. For a preview, look to one of the world’s former economic miracles: Ireland. As its deficit approaches 15 percent of GDP, plans are in the works to cut 17,000 state jobs (the equivalent of the U.S. cutting 1,250,000 workers), rural schools are closing, and 6,900 teachers terminated.
The total debt of most European governments and the U.S. are approaching or surpassing the dangerous 100 percent of GDP level. Japan’s debt is expected to exceed 240 percent of its GDP by 2014.
Something has to give. As the torturous budget negotiations in California showed, when governments are finally forced to confront years of extravagant spending from prosperous times — they will act kicking and screaming with Draconian solutions. It’s already begun.
