From USA to ISA?? (Indebted States of America)

An interesting piece by Steven Malinga, senior editor of City-Journal.

He shows how several states in US have piled on debt using fancy accounting tricks, fancier bonds, circumventing law and so on. An interesting tale of states:

Maria Pappas, the treasurer of Cook County, Illinois, got tired of being asked why local taxes kept rising. Betting that the answer involved the debt that state and local governments were accumulating, she began a quest to figure out how much county residents owed. It wasn’t easy. In some jurisdictions, officials said that they didn’t know; in others, they stonewalled. Pappas’s first report, issued in 2010, estimated the total state and local debt at $56 billion for the county’s 5.6 million residents. Two years later, after further investigation, the figure had risen to a frightening $140 billion, shocking residents and officials alike. “Nobody knew the numbers because local governments don’t like to show how badly they are doing,” Pappas observed.

Since Pappas began her project to tally Cook County’s hidden debt, she has found lots of company. Across America, elected officials, taxpayer groups, and other researchers have launched a forensic accounting of state and municipal debt, and their fact-finding mission is rewriting the country’s balance sheet. Just a few years ago, most experts estimated that state and local governments owed about $2.5 trillion, mostly in the form of municipal bonds and other debt securities. But late last year, the States Project, a joint venture of Harvard’s Institute of Politics and the University of Pennsylvania’s Fels Institute of Government, projected that if you also count promises made to retired government workers and money borrowed without taxpayer approval, the figure might be higher than $7 trillion.

Most states have restrictions on debt and prohibitions against running deficits. But these rules have been no match for state and local governments, which have exploited loopholes and employed deceptive accounting standards in order to keep running up debt. The jaw-dropping costs of these evasions have already started to weigh on budgets; as the burden grows heavier, taxpayers may decide that it’s time for a new fiscal revolt.

The history of states debt forced states into balancing budgets but it is ignored now:

Today, states and localities engineer most of their borrowing through what Briffault calls “non-debt debt,” a term for bonds designed to avoid legal restrictions on borrowing. For example, courts in some states have decided that when a state’s independent authorities issue bonds, that borrowing isn’t restricted by constitutional debt limits—even if taxpayers are ultimately on the hook for it. If a legislature takes on debt itself, that also doesn’t count against constitutional restrictions on borrowing, according to the judiciaries in some states. Briffault estimates that such evasions are responsible for three-quarters of state debt and two-thirds of municipal obligations incurred through bond offerings. The growth of this kind of borrowing helps explain why state and local debt outstanding from municipal securities has blasted from $2 trillion (in today’s dollars) in 2000 to nearly $3 trillion today—real growth of 50 percent in little over a decade.

There is just one thing which author misses here – role of Wall Street…It is unlikely that state politicians can engineer these fancy contracts on their own. The brains to design these contracts would be coming from the street in NY who would have made killing selling these bonds…

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