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Wednesday, July 14, 2010 7:21 PM


Municipal Bonds Benefit as States Kick the Can Down the Road; How Long can it Last?


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States continue to hope, pray, and pretend, putting off until tomorrow, fiscal responsibility needed years if not decades ago.

Please consider some prime examples from No Defaults for States as California Favors Bonds Over Workers

  • Illinois let $5 billion of bills go unpaid.
  • Minnesota is delaying corporate and sales-tax refunds, postponing school and medical aid and setting up a $600 million bank line of credit.
  • New Jersey is planning to refinance about $250 million of general-obligation bonds to push $202.5 million of debt-service costs into future fiscal years.
  • Illinois, is selling $900 million of bonds for capital projects this week.
  • 22 states put staff on temporary leave.
  • Arizona sold its House of Representatives and Senate buildings.
  • California solicited bids for 11 of its office complexes.
  • Delaware saved $29,000 by eliminating flowers at the state psychiatric hospital and health department.
  • California Governor Arnold Schwarzenegger, facing a $19 billion budget deficit for the year that began this month, is trying to force 200,000 state workers onto minimum wages temporarily.

All of those half-assed measures assume the economy is going to get better later this year. Instead I suggest states should expect a Second-Half Housing and Durable Goods Crash.

For now, the municipal bond market seems placated with states not running out of money simply because they have stopped paying bills and/or have temporarily expedited income tax collection.

I do not know how long that can last, but the second-half is likely to be quite telling.

Too be sure, states are making some needed cutbacks. However, the fiscal game playing exceeds needed austerity measures by a mile.

California alone is $19 billion in the hole and that is after California enacted a temporary 1 percentage point increase in the sales tax rate (expected to generate about $4.5 billion in fiscal 2010) and after it accelerated income tax collection.

It is also after patching a $24 billion hole earlier in the year.

Literally no state is remotely prepared for the second-half tsunami coming down the pike.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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