State Budget Deficits Keep Growing, Taxpayers to Get Stuck Footing the Bill

Wall Street and the media have been fixated with the debt crises in countries such as Greece, Portugal and Ireland. But we're not hearing nearly enough about a much bigger economy closer to home that's on the brink of disaster. We're talking about California -- the eighth largest economy in the world. And it's not alone.

Years of overspending have pushed many state and local governments across the United States to the brink. Facing huge deficits and massive budget shortfalls, state governments are now faced with drastic and painful decisions. We are already seeing this play out in the massive protests in Wisconsin over public employee benefits and union rights.

But don't think for a minute that you have nothing to worry about if you don't live in California or Wisconsin. Statistically speaking, it's likely that your state may be in deep financial trouble, too. In fact, 44 states are on track to come up short on funding their budgets in 2012.At the moment, states are prohibited from declaring bankruptcy. But, this situation is so critical that lawmakers in Washington are quietly considering a special bankruptcy provision for states.

Just How Bad Is It?

You and your family will be affected by these financial shortfalls. To help you get a sense of just how serious this situation is, here's a sampling of the impact the budget crunch is having around the country. Things are so bad that:
  • Arizona has sold off and is leasing back the state capitol, the state Supreme Court building and the state's legislative chambers.
  • Some of the bonds issued by states like California and Illinois are now rated as junk status.
    Things have gotten so bad that many financial pros, including us, are concerned that some issuing authorities will not be able to pay their municipal bond obligations.
  • Illinois, which is regarded by many as the state in the worst financial shape, has approximately $6 billion in outstanding bills that have not been paid.
  • Camden, N.J., the second most dangerous city in the U.S., is about to lay off 45% -- yes, that's right, almost half -- of its police force.
  • Oakland, Calif.'s police chief recently announced that his department is so shorthanded that they simply won't be able to respond to such crimes as identity theft, vandalism, burglaries, grand theft and car accidents.
  • There were 343 municipal bond downgrades in the first nine months of 2010 -- including major cities such as Chicago, Los Angeles and Philadelphia.

So how do you think your state fares in this mess?

A recent survey conducted by American Pulse found that residents in the following states were most concerned that their states may be in deep financial trouble and unable to meet service obligations to its residents (in order of the highest percentage of concerned):

1. Illinois
2. California
3. Michigan
4. New York
5. New Jersey
6. Arizona
7. Washington
8. North Carolina
9. Ohio
10. Pennsylvania

But here's the funny thing, the states people are most concerned about aren't necessarily the states in the worst financial shape.

The Top 10 States in Biggest Trouble

The most commonly used measurements to determine a state's financial condition are:
  1. State indebtedness as a percentage of the U.S. Gross Domestic Product... the higher the ratio, the longer the state will stay in trouble
  2. The state's percent of unfunded pension benefit obligations
  3. Unfunded health care obligations for retirees
Before you dive into a pile of your state's financial reports, let us save you some time. The Daily Beast, utilizing the above three criteria, crunched the numbers and their top 10 list of states in the worst financial shape may surprise you:

1. Rhode Island
2. Connecticut
3. Massachusetts
4. Illinois
5. Hawaii
6. New Jersey
7. New Hampshire
8. Indiana
9. Louisiana
10. Oklahoma

If your state is in fiscal trouble it could mean:
  • Severely curtailed public services, such as trash pick up, snow removal, etc.
  • New taxes and fees in order to raise revenue
  • Less money to hire new employees... and less pay for those new hires
  • New taxes and fees on businesses, perhaps driving them out of the state and exacerbating employment woes
  • Defaults on municipal bond obligations
So where are the states going to get the bucks to try to meet their budgets?

Borrow from Washington D.C.? Not likely. They already owe billions of dollars of interest for $42 billion in loans from the federal government to pay unemployment benefits for state government employees.

Nope. They'll probably turn to the same old source: us. In fact, 36 states have already increased taxes and/or fees to put a dent in their mountain of debt. Read some of the most outrageous taxes they cooked up here.

So don't be fooled by all the rosy talk about our economic recovery. We are still facing some tough times. Unlike our governments, make sure your financial house is in order by spending less on life's necessities and reducing your debt.

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