Several states are showing scary illiquidity.  New Jersey’s governor just yesterday impounded funds the legislature had already appropriated and announced a state of emergency.  He stopped short of “declaring” emergency, which would have given him special powers over contracts.  New Jersey comes up high on the list of states with big budget gaps, heavy pension obligations and loudly falling revenues.  New Jersey spending has grown dramatically over the last 25 years.  While there was one state employee for every 86 people in 1982 in the state, today there is one employee for every 60 people.  In the 2000-2008 time period, spending grew 28% on a constant dollar basis.  Debt as a percent of gross state product (adjusted for real 1982 dollars; bear with me) was 11.1 percent in 2008 — among the top ten states, but no where near the US figure of around 60%.  This is not to mention any unfunded pension liabilities plus $1.2 billion borrowing from the US Treasury to make unemployment insurance payments.

Illinois is in the same deep water.  One month ago the state had $5.1 billion in unpaid bills and is delaying payments to vendors by than 90 days.  Crain’s Chicago Business shows columnist Greg Hinz saying its unclear when full insolvency takes place — it just gets slower and slower until business moves out and payroll isn’t met.  

Lets roll back the clock.  The Reagan administration in the early 1980’s proposed the “Program for an Economic Recovery” which devolved programs from the federal to the state and local level.  The action coincided with the end of the 1982-83 recession when the economy took of sharply leaving surplus in many states’ coffers.  For seven straight years state governments increased their budgets 8% each year or 3.2% in constant dollars.   The recession in the early 1990’s left the states poorly positioned to handle the downturn.  Like today, there were mid-year budget reductions, cuts in aid to local government and increases in taxes.  New Hampshire, Rhode Island, Massachusetts, California and Illinois saw ratings downgrades during that time.  Record tax increases led to voter unrest and new tax limitations.  In the mid-term elections, Bill Clinton lost the House of Representatives to a Republican majority.  Newt Gingrich and his party’s “Contract With America” promised 10 bills in 100 days — to further devolve social programs to the states.  Fast forward to the high tech boom in the late 1990’s and bust, then 9/11.  There was monetary easing and policies designed to advance homeownership and voila, here we are today.  I’ve linked two charts that show state spending increases in constant dollars sorted from high to low state expenditure table1992-2000 and state expenditure table2000-2008.  California, for example, held the line during the “Contract with America” years, but expanded 29% between 2000-2009.  Rhode Island also held the line during the first period but grew 30% from 2000-2008.  Illinois grew its budget in constant dollars in both periods — 22% from 1992-2000 and another 20% from 2000-2008.

Also attached is a power point of a talk I gave this week on these topics at the National Federation of Municipal Analysts advanced seminar in Florida.