Gambling with the Future: America’s State and Municipal Debt Crisis
Since the late 1970s easy money flowed from slot machines to the municipal government of Atlantic City. In the last six years casino closings have caused the city to loss 70% of its revenue.
Atlantic City, nicknamed America’s Playground, played with its money like it was at a craps table. It gave its city council members free cars, it gave its seasonal lifeguards generous pensions along with everyone else. It borrowed at first because it was even more easy money to add to the money the city was getting, then they borrowed because they needed more prestigious projects, they then borrowed because the city revenue was drying up and now the tax base depleted along with the lender’s patience the city’s bonds have been classified at junk bond status.
On May 27th after over a month of intense negotiation between Mayor Don Guardian and the state, Governor Chris Christie of New Jersey signed an ultimatum into law giving Atlantic City until the end of the year to balance its books to avoid government takeover. It’s merely band-aid, as many analysts have noticed Atlantic City’s bankruptcy as a virtual certainty.
Atlantic City, since the days of Boardwalk Empire has been run by a dysfunctional political class, but what makes this bankruptcy more difficult is dysfunctional political class in Trenton. A New Jersey municipality has asked the state legislature permission before declaring bankruptcy, looking at the numbers it would probably make sense to allow the city to declare bankruptcy, and restructure its debt and make deals with its creditors, but there are other political forces at work.
New Jersey’s municipal bond debt is hardly unusual. Five other NJ cities have had their bond status downgraded to junk bond levels: Paterson, Union City, Asbury Park and Kearny. Both Republicans and Democrats will not let Atlantic City declare bankruptcy out of fears it will drive down the ratings of municipal bonds as well as New Jersey state bonds for teachers’ pensions and infrastructure projects. Atlantic City’s bankruptcy could trigger a domino effect, bond values dropping further and investors less willing to extend credit. I wouldn’t bet on Atlantic City getting its books together by the beginning of 2017. The state will take over just like it took over Camden during its debt crisis in 2012. An even safer bet is that in the next ten years another large NJ city will have its bonds collapse, then another, and within decade or two the state won’t have the money to take over these cities as the pension liabilities New Jersey has let build up for decades will drag the whole state down
Further down America’s Atlantic coast there is a full blown debt crisis occurring. Puerto Rico is suffering from one of Herculean/Modern Greece-level proportions. Puerto Rico’s debt was amassed when corporate tax rates to attract new businesses expired around 2006 and many industries left the island along with residents who went to the mainland United States looking for jobs. The island sunk into recession and its people started to leave by lifeboat load, its tax base depleted the island took on debt until it was completely under water. Now there are power outages, hospitals are having trouble staying open and services are being cut. This American territory is starting to resemble Cuba, as free government run electricity is being cut and hospitals are running short of supplies. United States territories like Puerto Rico cannot file for Chapter 9 Bankruptcy, Congress however could amend the law or outright bail them out. However there are interests that don’t want this to happen. It’s not Wall Street who lent the money to Puerto Rico, it another debtor: the state of Illinois. As the New York Times says:
“any sweeping debt reductions allowing Puerto Rico to go back on its bond promises could put a chill on investment in American municipal debt, raising the cost of borrowing–and of roads, bridges and other public works–for struggling cities.”
Only Illinois has a lower credit rating than New Jersey, its pensions for its state employees are far more underfunded than New Jersey and is already at crisis levels. It has only funded 45% or its pension obligations and is right now at over $111 billion in underfunded liabilities. There is already talk of the state seeking bankruptcy or bailout from the federal government in the near future. Until then, Illinois municipalities are still borrowing. If Puerto Rico is bailed out or given bankruptcy it is feared that it will hurt the value of Illinois bonds and drive the state into bankruptcy sooner.
This week President Obama announced support for a plan to restructure Puerto Rico’s debt. The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) has already passed in the House and is likely to pass the Senate, hopefully before July 1st when a $2 billion dollar debt payment is due. Even with PROMESA this debt problem isn’t going away for America or her colonies. California was in a budget crisis from 2008 to 2012, and with $443 billion in debt, is likely to fall into one in the near future.
Alaska, like Venezuela, has been hit by the drop in oil prices. 90% of its state budget comes from oil revenues. Their crisis is temporary because the state has since the 1970s put aside approximate 53 billion dollars into the Alaska Permanent Fund. Things look a lot worse in Louisiana, which is in a budget crisis caused mainly by ex-governor and failed presidential candidate Bobby Jindal who in the tradition of Reagan and Nixon cut taxes while increasing spending.
This trend isn’t going to stop. This November the United States will either elect a woman president who is a member of the same political party as our current president who has been the biggest spender in American history, or a Republican who owned casinos which have since gone bankrupt in glorious Atlantic City, and now promises to increase both our colossal military spending but also to increase funding of Social Security and Medicare, the two programs which equal nearly 50% of US spending. No matter who we elect they won’t care about paying for today because there is still tomorrow. Come 2017 Trenton will probably take over Atlantic City. I wonder which entity or nation will take over the United States when our bonds become junk. Future generations will curse the receivers who will take over in the national bankruptcy as viceroys of our creditors who are democratically unaccountable to the citizens – they didn’t vote for them, but we sure as hell did.