If you think the fiscal woes of states are abating, think again. Three municipalities in California have now declared bankruptcy within a period of three weeks. A report issued recently by the State Budget Crisis Task Force says the issues causing the bankruptcies of those three cities will continue to challenge state budgets well beyond the economic recovery.
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Issues have been brewing under the surface for states for years and have been hidden behind lax governance and opaque accounting practices. The 2008 crisis exposed the deeply hidden fiscal problems by making it more difficult for states to meet their obligations toward pension plans and also in managing rising healthcare costs for pension beneficiaries.
Since the problem took years to build to that point, it’s unreasonable to think these issues will be resolved overnight, so to speak.
Many cities and states have had to cut services and they are rethinking how they will build those services back. Jobs cut in the penal systems, hospitals, courts, and government agencies were more severe than in past recessions.
The report was published just at the time when states are reevaluating their Medicaid and other benefit programs and notes that states are in worse condition than they seem. This points to the need to be ever more vigilant in evaluating municipal bonds issued by municipalities and states and to renew conversations with clients about potential hidden risks
they may face.