In today's Wall Street Journal Meredith Whitney discusses the predicament facing states.The stimulus is spent. States still face huge pension funding shortfalls, growing Medicaid bills, and increased levels of debt service. Revenues are insufficient to fill the gap.
In the past few months several states have been downgraded by credit ratings agencies including
New Jersey, Illinois and most recently Hawaii. Illinois responded by raising taxes in order to improve its rating.It is this downward spiral that is so worrying. Ms. Whitney suggests
defaults are going to become a more likely scenario. First taxpayers
will take the hit in the form of higher taxes and fewer services.Where this results in punitive taxation, out-migration of business and residents will result in a diminished tax base and less economic growth.
The next group to face the new fiscal reality are labor unions. Governors, legislatures and city councils are beginning the work of restructuring benefits and compensation packages for public employees. Ms. Whitney cautions that municipal bondholders will face contract renegotiation in some cases as local governments restructure their debts.
Where does the federal government fit into this picture? The most obvious linkage is in the Medicaid program. This makes entitlement reform one of the keys to fixing not only federal spending but state finances as well.
The next group to face the new fiscal reality are labor unions. Governors, legislatures and city councils are beginning the work of restructuring benefits and compensation packages for public employees. Ms. Whitney cautions that municipal bondholders will face contract renegotiation in some cases as local governments restructure their debts.
Where does the federal government fit into this picture? The most obvious linkage is in the Medicaid program. This makes entitlement reform one of the keys to fixing not only federal spending but state finances as well.
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