The State Budget Deficit Derby Finalists

Many States cannot legally resort to bankruptcy to clear the decks on their busted budgets. With taxpaying voters justifiably recalcitrant to hand over more dough to governments at any level, budget impasses will only get more interesting as shortfall pressure builds. When resources are scarce, what do competing interests do? Smile and shake hands? NOT!

So let's consider the positions and actions of the heavy combatants in coming budget debacles. Who do you think will win? Who has the strongest hand? Who will voters/taxpayers support?

Public Employees
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Public employee one-way ratcheted pay and pension benefits are the proverbial parasite killing the host. the employee unions will argue that their compensation is contractual and cannot be diminished. They will do whatever necessary to fight layoffs and hour reductions. In Stockton, the police officers' union sponsored a graphic (blood on the streets) billboard campaign warning residents that any reductions in staffing will regrettably make in impossible to guarantee their safety. Gee, I didn't know we had a guarantee now? Do we? How'd we miss it? Colorado has taken a bold and courageous stand against budget shakedowns by the public sector, going after CURRENT pay and pension benefits.  This is a very powerful interest group with a big voting block and strong lobbying.


Schools
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Schools take a big share of most budgets. Schools have been dealt a number of cutbacks already including layoffs. Schoolers have been reluctant to compete head-on with other public employee interest groups. Where possible (universities) they've resorted to compounded fee increases. There will be a resistance point for that... just haven't seen it expressed fully yet.  Will the school interest group be willing to detonate real bombs?  Like closing neighborhood schools (already FULL) and sending those kids even FULLER schools farther away?


Bondholders
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Running last (at least for now) behind schools and public employees for claim on state money are state bondholders.  Even in debt-soaked California, state bond interest is still in single digits... something like 7% of the budget.  But even that money is a juicy target. Why not just stiff the bondholders?  Don't think so. Bondholders have connections. And even more importantly, states need bonds even in normal or good years to deal with highly seasonal and variable income streams from taxes. Unless taxation can be changed to provide steady revenue (there's a good battle that will bring EVERYONE in) states absolutely cannot do without bonds.  Plus, the cost of state bonds is directly related to the perceived ability and commitment of the state to pay the interest. What sane state would risk injuring its #1 finance tool and making it cost much more?


At this point, I'm betting on bondholders to win the budget deficit derby. They will be paid their interest on time, regardless of the political fires raging all around. Who will come in second? The powerful public employees unions and lobbies, or schools? Can either interest group come out of this without major structural changes? Let's see what happens when tapped-out public pension funds start appropriating money out of state general funds... should be a fascinating debate.  In the meantime, as state bond interest goes up, those tax-free bonds might start looking pretty good compared to essentially zero-percent Treasuries and money market funds...