Whistling past the graveyard…again

As concerned as we all are by increased Federal taxes effectively siphoning off local money from schools, police, fire, safety and other local government needs and functions, the problem may be even worse in a year or so than it is now. The zero-sum game of taxation means that sending more to Washington also means that we have correspondingly less to spend here at home. This is a national problem and not just one for Ohio, West Virginia, Pennsylvania or the Ohio Valley.

Exacerbating the problem is our demographic trend. Our region is getting older, poorer and our tax base is shrinking. The percentage of us who are working and paying taxes is shrinking and there is nothing in sight to ameliorate that negative trajectory.

With about a third or more of their revenue coming from or through the states, our schools and other local agencies and institutions, including local governments, depend heavily on flow-through funding from the state. Our states, though, are going broke. Nationwide, state budgets are facing cumulative budget shortfalls in excess of $200 billion in the next year. That’s more than a quarter of the total of all state budgets.

Beyond that sobering scenario, many state health care and public pension funds have or are falling behind the fiscal power curve and are underfunded. I will leave uncontrolled Medicaid liabilities for another time, but suffice it to say that record levels of Americans, nearly 50 million, are now on the Medicaid rolls.

Unlike the Federal government, states are not allowed to own and operate their own presses to print money. So what happens when they can’t meet their financial obligations to local governments, schools, bond holders and others?

It means that we could see a collapse of the bond market, similar to the housing/mortgage market, if enough states, cities and towns can’t make their payments. This recently occurred in Harrisburg, Pennsylvania and was staved off only by a last-minute bailout by the state taxpayers. Absent real and pronounced economic recovery, there are limits on the supply of money to meet obligations and low interest bonding could become a thing of the past, requiring higher taxes up and down the line.

Rather than balancing their budgets for real, many states used all or some to the recent $60 billion in “stimulus” money to avoid hard choices in their budgets. In many cases, there were no effective measures to control spending. The face-to-face confrontation with fiscal reality was delayed for a year or so. From my misspent youth, I recall old timers referring to this sort of approach to danger as whistling past the grave yard.

Stimulus money won’t be around next year. The Feds are nearly $15 trillion in the red and the national debt counter is spinning faster than a ceiling fan in summer. That amounts to nearly a year of our nation’s Gross Domestic Product. That’s a little like each of us having to pay everything we make all year just to cover our bills and nothing else.

If the Feds don’t quit feeding this debt monster and face up to fiscal facts now, we will never be able to whistle or walk fast enough to get past this financial graveyard.