If you are like me, you probably hear the news on a regular basis about the federal government being broke, trillions of dollars in debt, and hopelessly spending more money that it is taking in. In recent years, many states have begun to find themselves in a similar predicament. There is one big difference; states can not print money like the federal government. The ability to print money will keep Uncle Sam going for a few years even though he is officially broke. Estimates suggest that the federal government may have a total debt of near $20 trillion within the next 6 to 7 years.
This past weekend, the New York Times reported that the State of Illinois is already in the throes of a major financial crisis. According to the article, Illinois currently has $5 billion in unpaid bills, some that are past due as long as six months! I am a personal finance writer and try to stay away from heavy articles on macro economics. I leave that to the economic professors at Yale and Harvard. At first blush, it may seem that this is an article that would fall into that category, but upon close examination you will find that if your state is going broke it may become a very major factor in your personal finances.
States Considered Financially Troubled
Does Your State Owe You Money?
Think about this question very carefully before formulating an answer. Do you have a tax refund coming? Are you receiving (or entitled to receive) a state pension? Do you own a business that sells products or services to the state? Are you employed by the state?
When you start considering this question in its full context, almost everyone has some direct financial risk if their state is unable to pay their bills. Lest you think this is just the ramblings of a mad man based on some 'future prediction,' California started last year sending out IOU's instead in place of state income tax refund checks. This is happening right now! See picture below. This is an actual IOU received by a California taxpayer that has been posted online. Officially called a ‘registered warrant’ of the State of California, it will not spend at the grocery store, gas station, or anywhere else for that matter.
One of my biggest concerns is for people that own state bonds. The credit ratings of several major states have been dropping precipitously. What if your state bonds just became worthless and the state could no longer pay the interest owed (no less the principal)? This is something to be very concerned about if you own bonds issued by a financially troubled state.
States Finding It Harder To Raise Money By Selling Bonds
Many states are now finding it more and more difficult to raise money by selling bonds. Illinois has faced recent downgrades in its bond ratings from the major rating services and is starting to see investors demand higher interest rates. California’s bond rating has been cut repeatedly, now at an A– and Moody is warning about more reductions in bond ratings in New York, New Jersey, and Illinois.
The Domino Effect; How Your State's Finances Can Affect Your Own
Since states can not print money, their only options are to raise taxes or borrow by selling bonds. No, don't expect them to cut their spending. Despite the loss of millions of jobs in the private sector, most state governments have added jobs during the most recent three to five years. Yes, the government keeps expanding while the private sector is shrinking.
Consider all of the fees you already pay to the state from sales taxes, tolls, vehicle licensing, etc.... Now, imagine these all being hiked by the amount needed to pay the unpaid bills in the state coffers. States are looking to raise money any way that they can.
What about your job? You may not work for the state perhaps, but what if your employer derives a significant part of its income from contracts with the state? If those contracts are canceled or not paid as agreed, would your position be eliminated?
Are you currently relying on any state benefit programs? For example, does anyone in your family avail themselves of any state funded medical care or other social services?. What about those that rely on Medicaid for medical care or long term care in a nursing home? By the way, employees of nursing homes would be a prime example of a job that is funded mostly by state funds (albeit indirectly).
If you are a police officer, teacher, or any civil servant for that matter, that is paid by a troubled state you should start taking inventory of that 'security' you thought you had.
Here is a story from today’s issue of USA Today on expected state government layoffs.
What To Do Now
I have outlined the potential financial ramifications with the purpose of giving you a ‘heads up’ to be able to think through the entirety of your own financial situation. As much as these stories are in the news, many people don’t connect the dots and see how these events can end up on their own doorstep. Sort of like Noah was given ample warning to build an ark, I offer the same to you.
Do you have your own thoughts on this issue? Please share them using the comments section below.
Helping you make the most of God’s money!