(whats going on in the USA???????)
By Tom Dyson
"Soap is set to run out before Thanksgiving!"
My friend is a schoolteacher in Clark County, Nevada. He teaches third grade at a public school. We spoke last week. He told me his school is having a budget crisis. They're running out of all the basic supplies they need to run the school... like soap, paper, and toner for the printers.
"It's ridiculous. How do they think we can teach without printer paper and toner? I asked for pencils last week. They gave me 12 pencils. But I have 16 kids. How can I teach them to write without pencils?"
The trouble is, the state of Nevada is broke, and there isn't enough funding for the school system. My friend says they've already cancelled all the new projects and programs his school was hoping to start next year. And they don't have enough money for immediate expenses.
The problem is so bad, that this week, Nevada Governor Jim Gibbons said he'd take a pay cut to help ease the situation. Nevada pays Gibbons $141,000 per year.
California has the same problem as my friend's school. They are fighting against an $11.2 billion budget deficit this year. But the cash shortage is so severe right now, there's a probability schools will shut down, garbage trucks will stop running, and hospitals won't open.
Last month, Governor Arnold Schwarzenegger wrote a letter to Treasury Secretary Hank Paulson asking for an urgent loan of $7 billion to keep the state running. Schwarzenegger said he's increasing California's sales tax by 1.5% to raise revenue for the state.
Last week, Connecticut Governor Jodi Rell called an emergency press conference and told reporters Connecticut was facing a $6 billion deficit over the next few years. "Cuts have to be made," she said.
Meanwhile, Minnesota Governor Jim Doyle said his state's budget deficit would exceed $5 billion through 2011. This is by far the largest deficit in Minnesota's history.
The Economist reports that state tax revenues have fallen in 31 states this year. It's a result of the recession. People earn less, so they pay less income tax. Their houses have fallen in value, so they pay less property tax. Companies cut back, earn fewer profits, and pay less corporate tax. And consumers buy fewer goods and service and pay less sales tax.
Meanwhile, people demand more money from the state. They want new public works projects to increase employment, better health care, and more benefits for the unemployed.
In short, state governments are broke right now... and it's about to get worse.
Unlike the federal government, state and local governments can't print money to fix their problems. The municipal bond market is where state and local government go to borrow money from investors. California, for example, is the largest issuer of municipal bonds in the country. So when California runs out of money, it's either going to default on its loans in the municipal bond market or the federal government will have to bail it out with a huge loan.
The market has pushed up yields on municipal bonds to account for this risk. And I've heard many fund managers and professional investors say municipal bonds are a great deal right now because you can get after-tax yields approaching 10% for the next 30 years by buying AAA-rated municipal bonds.
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