Wednesday, July 14, 2010

Free Fall - States Dodge Defaults as California May Cut Worker Pay

Arnold Schwarzenegger, governor of California
Arnold Schwarzenegger, governor of California. Photographer: Ken James/Bloomberg 

Illinois let $5 billion of bills go unpaid. Washington closed state offices. California may cut 200,000 workers’ pay to the minimum wage. Minnesota is delaying tax refunds for a second year. 

As fiscal 2011 budgets took effect July 1, state and local governments coping with revenue declines from an economic slowdown are fulfilling legal obligations to balance their books by shaving costs and raising taxes to protect a key constituency: owners of $2.8 trillion of municipal bonds. 

“States have taken all measures so far to make sure they keep capital markets open by honoring their debt payments,” said Richard Ciccarone, a managing director for McDonnell Investment Management LLC in Oak Brook, Illinois, which owns $7 billion of municipal bonds. “They are doing everything they can.” 

States cut spending by $74 billion since 2008 and more than half raised taxes and fees in 2009, the National Association of State Budget Officers said. That’s as the worst economy since the 1930s sent May unemployment as high as 14 percent in Nevada, topping the 9.5 percent U.S. rate, and deflated real estate values. As a result, state revenue fell $95 billion, or 12 percent, from September 2008 to the end of 2009, according to the U.S. Census Bureau, pushing tax collections to 2006 levels. 

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