Guess What America? Your Cities And States Are Flat Broke

Now that the economic boom times of the earlier part of the decade are over, cities and states across America are going bust.  In fact, for a growing number of local governments throughout the United States, there is no getting around the fact that “flat broke” accurately describes the situation that they are facing.  For many of these cities and states that are on the verge of bankruptcy, the American Dream is quickly turning into the American Nightmare.  Unlike the federal government, which can ask the Federal Reserve to print up some more money when they get into trouble, state and local governments have nowhere to go when the well runs dry.  They either have to raise taxes or cut spending.  But in many areas of the country, services have already been cut to the bone and people are already being taxed into oblivion.  So what can be done?  Well, many of these state and local governments are just going to have to cut spending even deeper, squeeze even more taxes out of their residents, or go to the federal government for a handout.       


America Your Cities Are Broke

Once upon a time, municipal bonds (used to fund such things as roads, sewer systems and government buildings) were viewed as one of the very safest of investments. 

But now all of that is changing.

According to Distressed Debt Securities, in 2009 183 municipal borrowers were unable to make $6.4 billion in loan payments.

Just two years earlier, those numbers were 31 and $348 million.

As you can see, that is not a good trend.

The truth is that municipal governments are facing an unprecedented fiscal crisis.

In fact, the National League of Cities recently announced that municipal governments will collectively come up somewhere between $56 billion and $83 billion short between now and 2012.

So where will all of that money come from?

It will have to come from spending cuts, tax hikes or handouts from the federal government.

Or, if something is not done, we are going to see a massive wave of municipal defaults.

Case Study: Detroit

The situation is particularly dire in areas that have been hit hardest by the economic crisis.

To make up for a projected 2010 budget shortfall of 280 million dollars, the city of Detroit issued 20-year municipal notes totalling 250 million dollars in March.  But there is a real question as to whether or not Detroit is actually going to be able to meet these obligations.  In fact, Detroit officials are openly admitting that if the financial state of the city does not rapidly improve, it could be forced to declare bankruptcy.

What a sad state of affairs for what was once one of America’s greatest cities.

During the economic boom times of the 1950s, Detroit was a thriving metropolis of approximately 2 million people.

Today, the current population is less than half that and people are leaving in droves.

But even the people who are still there can’t get jobs.  The mayor of Detroit says that while the “official” rate of unemployment in Detroit is 27 percent, the “real” unemployment rate in his city is somewhere in the neighborhood of 50 percent.

But at least houses are cheap.

In Detroit, it is not uncommon to see homes advertised for under $1000, and in fact there are some houses in the city that you can actually purchase for just one dollar.

Not that you would want to live in those homes.

Violent crime is dramatically increasing in Detroit and vandals have been running around stripping everything of value off of many of the homes.

So what is Detroit doing about this crisis?

Well, they have decided to downsize.

Emergency Financial Manager Robert Bobb recently announced a plan to close 44 Detroit schools.

Also, Mayor Bing has promised to bulldoze 3,000 Detroit homes this year, and an additional 7,000 over the following three years.

But that will only make a dent in the urban blight.  According to one estimate, the city of Detroit has 33,500 empty houses and 91,000 vacant residential lots.

So if you are looking for some really cheap housing you might want to consider moving to Detroit.

Just don’t count on getting a job.

America Your States Are Broke

But it is not just local governments that are broke.  Entire U.S. states are on the verge of bankruptcy.

In fact, a large number of U.S. states are preparing for their biggest budget cuts in decades.

An article in CNN recently put it this way….

“Think states have made deep spending cuts? You ain’t seen nothing yet.”

In 2008 and 2009, economic stimulus money helped many states make it through the financial crisis, but now that money is drying up and many states do not know what they are going to do.

Already, half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks.

That would have been unthinkable a couple of decades ago, but these are desperate times.

In fact, New York state has delayed paying bills totalling $2.5 billion as a short-term way of staying solvent.

But those bills have got to be paid some time.

So what has caused this huge financial mess?


Just like the U.S. federal government, state governments have gotten themselves into reckless amounts of debt, and now the day of reckoning is here.

And things are going to get a lot worse.

According to, 32 U.S. states have already run out of funds to make unemployment benefit payments and so the federal government has been supplying these states with funds so that they can make their payments to the unemployed.

So what happens when the U.S. government says that it wants to stop making those payments for the states?

But the pension crisis on the state level is something that is far more alarming.

Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars

Yes, you read that right.

3.2 trillion dollars.

So where will that 3.2 trillion dollars come from?

Nobody really knows.

Case Study: California

Many states are in massive financial trouble, but California is perhaps in the worst condition of all.

The economic crisis has hit the “golden state” particularly hard.

Businesses are shutting down at a stunning rate.  In the area around Sacramento, California there is now one closed business for every six that are still open.

Unemployment in California is absolutely exploding.  There are now 8 counties in the state of California that now have unemployment rates of over 20 percent.

In fact, the number of people now unemployed in the state of California is equal to the populations of Nevada, New Hampshire and Vermont combined.

The truth is that in this economic environment, not even teachers are safe.  Just recently, the state of California handed pink slips to nearly 22,000 teachers across the state.

Can you imagine firing 22,000 teachers?

But canning all of those hard working teachers barely even made a dent in California’s budget problems.

California Governor Arnold Schwarzenegger is promising to seek “terrible cuts” in an effort to bring the exploding debt of the government of California under control, but the truth is that it is hard to squeeze blood out of a rock.

Bob Herbert of the New York Times recently described California’s horrific budget crisis this way….

California has cut billions of dollars from its education system, including its renowned network of public colleges and universities. Many thousands of teachers have been let go. Budget officials travel the state with a glazed look in their eyes, having tried everything they can think of to balance the state budget. And still the deficits persist.

The truth is that California is bankrupt.  They can try to keep borrowing more money as fast as they can in an effort to push their problems off to another day, but in the end California is going to go belly up.

But the same thing could be said for the entire U.S. economy.  The total government, corporate and consumer debt of the United States has now reached 360 percent of GDP and is accelerating.  We have reached a point where there is simply no way out.  The only thing that can even delay the inevitable is to borrow even more money and to try to crank the debt spiral up one more time.

We have created an economic nightmare of epic proportions, and we have wrecked the future for our children and our grandchildren.

What a mess.