Many states have huge financial holes that could lead to a systemic crisis, experts say.
Budget deficits run into the billions of dollars in California and New York. States have taken on huge debt loads, many face shortfalls in their pension funds, and many are using accounting tricks to hide their true position.
The difficulties have faded to the background as the municipal bond market has surged. But if investors start to shy away from municipal debt, a crisis could rage at some point soon.
“If we ran into a situation where one state got into trouble, they’d be bailed out six ways from Tuesday,” Harvard economist Ken Rogoff told The New York Times.
“But if we have a situation where there’s slow growth, and a bunch of cities and states are on the edge, like in Europe, we will have trouble,” said Rogoff, a former International Monetary Fund chief economist.
California provides a good example of the accounting smoke and mirrors some states now use.
The state’s official debt totals 8 percent of its GDP, a large number but not out of control.
However when you add pension obligations, the number soars to 37 percent, according to The Times.
State and local governments will have to take severe steps, experts say.
"This is a completely unprecedented crisis," Ethan Pollack of the Economic Policy Institute, told CNBC.
"The budget cuts are going to get more and more severe."
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