Tag Archives: Boomergeddon

Layne Cautions Again about Excess Debt and Risk

The good news in Secretary of Finance Aubrey Layne’s presentation to the House Appropriations Committee this morning is that General Fund revenues, after a below-forecast start to the fiscal year, surged 27.4% in April. On a year-to-date basis, total revenues are 6.2% ahead of last year, beating the 5.9% forecast for Fiscal 2019.

The bad news is that U.S. economic prosperity is built on a mountain of consumer, corporate, and government debt. The national debt stands at $22 trillion, and the Congressional Budget Office says that debt as a percentage of GDP could increase from 78% this year to 96% by 2028. Plus, student debt exceeds $1.5 trillion, and credit card debt has surpassed $1 trillion, both record highs. And corporations are carrying a $9 trillion debt load, almost double the level of the Great Recession. At 46% of GDP, corporate debt is the highest on record.

Layne, a traditional fiscal conservative, is not predicting an imminent recession. Rather, he is saying that the U.S. economy and, by extension, the Virginia economy and state budget, are highly vulnerable to a downturn, should one occur. Continue reading

Spending Increases, Road Quality Decreases

Source: “Repair Priorities 2019

A new study by Transportation for America and Taxpayers for Common Sense documents the magnitude of the “Growth Ponzi scheme” in the U.S. road transportation system. Between 2009 and 2017, the 50 states collectively added more than 223,000 lane miles to their road networks. At an average cost of $24,000 per lane mile to keep roads in a state of good repair, that means states and localities have pumped up their maintenance liabilities by $5 billion a year.

But the states aren’t keeping up with those costs, contends “Repair Priorities 2019.” Nationally, the percentage of roads in poor condition increased from 15% in 2008 to 20% in 2017.

The problem isn’t a lack of money, argues Beth Osborne, director of Transportation of America. “We’re finding the money for expansion. There’s too little money to do everything, but we’re insisting that we do everything.” Continue reading

Virginia, Antifragility, and the Next Recession

Dust Bowl refugees in the 1930s. Will Virginia be on the delivering end or receiving end of the next recession-induced migration?

In the previous post I argued that there are large pockets of hidden risk in the U.S. and global economies that could trigger a devastating economic downturn. I’m not predicting that a recession is imminent — I do not profess to see the future — but I would suggest that only fools would pretend that these risks do not exist and fail to protect themselves from them.

As I have detailed in previous posts, Virginia is highly vulnerable to an economic downturn. The consolation is that we’ll have plenty of company. The Old Dominion is hardly the only state in the union that has failed to take advantage of 10 years of economic expansion to buffer itself from the next recession, which, unless President Trump has repealed the law of business cycles, is inevitable. What we don’t know is the timing. Do we have five years to adapt, or only one? Continue reading

“A Dozen Pockets of Extreme and Growing Risk”

Source: Dollarcollapse.com

The economy is chugging along at a 3% growth rate, unemployment is hitting record lows, productivity is surging. The economy looks like it’s in fantastic shape. A friend of mine and long-time Trump hater, normally disinclined to give the president credit for anything, marveled recently that the low-inflation, low-unemployment economy “is as good as it gets.” I hope like heck it stays that way.

But I am an inveterate worry wart. I’ve lived through booms before — the 1980s savings & loan bubble, the 1990s tech bubble, the 2000s real estate bubble. I’ve heard the promises that “it’s different this time.” And I’ve seen the busts that followed. It’s a universal rule that most “experts” did not foresee the meltdowns coming. The same thing may be happening again. Very few are paying attention to the build-up of highly leveraged corporate debt, both in the U.S. and abroad.

I don’t know if the “junk bond” sector will precipitate the next recession. Perhaps the next downturn will originate overseas and spread to the U.S., and a meltdown in junk bonds will merely act as an accelerant to a broader collapse. Whatever the case, the $1 trillion market now represents a significant risk. State and local governments in Virginia need to acknowledge this and other risks lurking in the economy as they go about making spending and taxing decisions. Only a fool would assume that the decade-long expansion, one of the longest in U.S. history, will last forever. Continue reading

A Pension System At Risk

Under a “shock” scenario in which Virginia Retirement System (VRS) investment returns replicated the disastrous performance of the 2008-2009 market crash, the state portion of the retirement plan would see an increase in unfunded liability of $6.9 billion. Employer contribution rates would have to increase to 22% of covered payroll from 13.5% now in order to maintain the integrity of the system. State and local governments would have to cough up hundreds of millions of dollars more in pension payments each year even as a recession was eroding revenues.

Those numbers are found in a recently released report to the General Assembly, “VRS Stress Test and Sensitivity Analysis.” The report is not predicting that such a scenario will occur. Rather the purpose is to show how vulnerable the Commonwealth would be if it did. While investment returns have performed handsomely since the 2008 mortgage-crisis recession, shrinking Virginia’s unfunded pension liability, the global economy is slowing and the strong investment gains of recent years cannot be taken for granted.

Even investment returns on the VRS’s portfolio only modestly lower than the assumed 7% could prove devastating. “If the VRS fund only returned 5% annually each of the next five years, the State plan would see an increase in unfunded liability of approximately $2.2 billion,” the report says. Continue reading

(Fiscal) Winter Is Coming

Congressional Budget Office projections of federal government annual budget deficits.

Let me set the scene by reviewing a few numbers. The federal deficit is on course to hit $1 trillion annually by Fiscal Year 2020. With retiring Baby Boomers swelling Medicare, Medicaid and Social Security expenditures, deficits will increase inexorably for decades. The U.S. national debt stands at $21.7 trillion. As deficits pile up and interest rates rise, the national debt expressed as a percentage of the GDP, 78% today, will reach 96% by 2028. CBO projects that interest payments on that debt will increase from $263 billion in 2017 to $915 billion by 2028, putting increasing deficits on autopilot that no amount of budget cutting can offset. Continue reading

Fairfax Supervisors Face County’s Monster Pension Crunch

Fairfax County Board of Supervisors Chair Sharon Bulova

Once upon a time, way back in the year 2000, Fairfax County’s general-employee pension plan was amply funded at 109% of projected needs. But the funding ratio dropped severely during the last recession and has been hovering around 70% in recent years. Today unfunded pension liabilities for Virginia’s largest local government are roughly comparable in size to that of the Virginia Retirement System, which which state employees and many local government employees participate.

Taxpayer groups are sounding the alarm and, astonishingly, the Board of Supervisors is actually studying proposals to address the shortfall.

County officials have proposed a range of tweaks to the pension plans for public safety workers and general employees. (School teachers have their own plans not controlled by the county board.) Among the changes: The minimum retirement age would be bumped from 55 to 60, the retirement-eligibility formula would increase age + years served from 85 to 90, and the final salary-averaging period for calculating retirement-payments would be increased from three to five. The changes would apply only to new employees hired on or after July 1, 2019, reports Inside NoVa.

Said Board Chair Sharon Bulova (D): “The Board, all of us, have felt this is a contractual, really, issue. If you joined the county under certain expectations and you’ve based your retirement plans on what you believed would be the deal when you came to the county, we are not changing that for current employees.”

Sean Corcoran, president of the Fairfax Coalition of Police Local 5000 described the proposed pension changes as “a completely contrived crisis.” Others speaking for county employees warned that the plan would create a new class of “second-class employee” and would hurt morale and recruitment.

But taxpayer advocates said the proposed reforms were just a start.

Arthur Purves, president of the Fairfax County Taxpayers Alliance, said while the county’s population increased 20 percent since 2000, inflation-adjusted salaries for county employees rose 35 percent, health-insurance payments went up 194 percent and pension costs increased 244 percent.

County real estate taxes since 2000 have increased three or four times more than the inflation rate, said Purves, who blamed compensation increases as the culprit.

The proposed pension cuts for new employees “are only a small and necessary start,” he said. “You need to look at raises.”

McLean Citizens Association president Dale Stein said county pension borrowing went up $600 million during the last three years and added officials were basing their calculations on average annual returns on investment of 7.25 percent, while returns over the past decade averaged just 5.9 percent.

“We strongly urge the Board of Supervisors to ensure a strong, competitive compensation package for all county employees,” Stein said. “In making those packages possible, the realistic question is, ‘Where in the heck is that money going to come from?'”

The Inside NoVa article did not say how much the proposed changes would reduce the unfunded liabilities.

Bacon’s bottom line: You can keeping kicking the can down the road but eventually you run out of road. The time to act is now. Relatively small changes today can fix a problem that is still a couple of decades away from a full-blown crisis. Failure to enact reforms, however, will make necessary changes all the more painful in future years.

Whispers of the “R” Word

Source: World Economic Forum

With the stock market taking a beating, all of a sudden economists are uttering the “R” word — recession. JPMorgan Chase & Co. has put the odds of a U.S. recession beginning within 12 months at one in three — up from an 8% probability a year ago, reports the Wall Street Journal.

Central Banks in Europe, Japan and the United States are walking back quantitative easing policies designed to fight the past recession, and interest rates are rising. Germany and Japan both reported negative growth in the past quarter, and the Chinese economy is slowing. The expansion of global trade has diminished to a crawl. The dollar is increasing in value, putting developing countries that went on a borrowing binge — in U.S. dollars — under heavy pressure.

The U.S. economy remains strong for the moment. But if developing nations start going Venezuela on us, it’s not entirely clear which banks, hedge funds, and other investors might go belly up, launching investors worldwide into risk-avoidance mode and sending cascades of fear ripping through the global economy in unpredictable ways — just as the subprime-mortgage fiasco did in 2007. The governing authorities did not foresee the last recession, and it’s like that the masters of the universe won’t see the next one coming until it’s upon us. One thing you can count on: With global debt as a percentage of global GDP at record highs, the unwinding of trillions of dollars of banking, corporate, government, and consumer debt will be frightful.

As I reported three weeks ago, Secretary of Finance Aubrey Layne conducted a sensitivity analysis of the Virginia budget to see what would happen if a recession comparable to the last one occurred. General Fund revenues would decline from $21 billion a year by $9 billion a year over three years. Admittedly, no one is predicting such a scenario… at the moment. But we would be fools to ignore the possibility, given the fact that the Commonwealth has set aside reserves utterly inadequate to help it through a 40% downturn in General Fund revenue. The impact on state governance would be catastrophic.

Against that backdrop, Virginia is flush with revenue right now from better-than-forecast economic growth and a series of potential windfall gains resulting from federal tax cuts, a Supreme Court ruling on Internet sales taxes, proposed entry into a regional carbon cap-and-trade system, and a Medicaid tax on hospitals. The big question is, what do we do with this money? Do we crank up new spending programs? Do we give some of the money back to taxpayers? Or do we build up our financial reserves to spare Virginia some of the trauma stemming from a possible reprise of the last recession?

Blue Wave Does Not Change Do-Nothing Consensus

The 2018 Congressional elections have been dubbed by some as “the most important mid-term elections in history,” but that’s mostly partisan blather. Democrats did indeed re-take control of the House of Representatives. But two more years of hyper-partisan gridlock will not change the nation’s perilous fiscal trajectory.

While many bemoan the lack of consensus in Washington, there is in fact a consensus — a consensus to ignore growing deficits and the surge in the national debt, except as a club to be wielded hypocritically against the other party. No one wants to touch entitlements. No one is serious about cutting discretionary domestic spending. And no one has articulated a scaled-back foreign policy that would permit a prudent shrinking of military spending.

As Trump and his antagonists mud-wrestle one another and the news media focus on political spectacle to the exclusion of all else, deficits will continue to climb, the national debt will continue piling up, un-cuttable interest on the national debt will consume an ever-increasing share of spending, and the Medicare and Social Security trust funds will get two years closer to depletion. The Medicare Hospital Insurance trust fund is scheduled to run out in eight years, Social Security’s Old Age and Survivors fund in 16 years. If you think politics are ugly now, just wait.

I would say that Americans are like ostriches with our heads stuck in the sand — but that would be an insult to ostriches.

Meanwhile, back at the ranch… Insofar as the 2018 elections can be said to have been a blue wave, the epicenter of that wave was Virginia. The switch of three congressional seats from red to blue portend gathering strength for the Democratic Party in the Old Dominion. If the electoral trends of the past two years continue — and there is no sign that they won’t — Democrats will take control of the General Assembly in 2019, seize the machinery of redistricting, and ensconce themselves in power for the next generation.

For the moment at least, the Republican Party is in no condition to resist the blue tsunami. Corey Stewart was an unmitigated electoral disaster. Being Trumpier than Trump is not a winning electoral formula in Virginia. But pursuing a moderate, technocratic formula didn’t work much better for Ed Gillespie in the 2017 gubernatorial race. The GOP has roped itself to the shrinking demographic base of rural/small town Virginia. It has no coherent message. It is floundering.

A blue Virginia portends a more activist government, more spending on “social justice” priorities, and higher taxes. Steve Haner’s recent piece, “Taxaginia,” lays out where we’re heading in 2019. Admittedly, the blue wave this year was propelled in great measure by culture-war issues — in particular the #MeToo movement and suburban women’s revulsion against Donald Grab-Them-By-the-Pussy Trump. But if you think the electorate will exercise a moderating influence on the tax-and-spend proclivities of the political class, just consider the referendum on Question No. 1.

Seventy-one percent of Virginians voted in favor of a constitutional amendment that would subsidize continued building in flood-prone areas. Given all the other fiscal challenges Virginia faces — unfunded pensions, under-funded capital spending, budgeting sleight-of-hand, and all the rest chronicled on this blog — the vote was utter folly. Virginians are in fiscal denial. I once thought of state/local government as the bulwark against federal collapse. I’m no longer so hopeful.

Update: Looks like John Rubino at Dollarcollapse.com and I are in sync on our appraisal of the national election. Writes John today:

As contentious as the US midterm elections were, there was never a scenario in which they mattered. Any possible configuration of Republicans and Democrats in the House and Senate would have yielded pretty much the same set of economic policies going forward: Ever-higher debt, upward trending interest rates and (through the combination of those two) rising volatility. … The system is on autopilot and it matters exactly not at all which party or which configuration of parties is running the asylum.

How Bad Can It Get? You Don’t Want to Know.

Try taking $9 billion out of this, and see what happens. Image source: Department of Planning and Budget

The United States is enjoying 112 months of uninterrupted economic expansion. We’re basking in one of the longest business cycles in American history — the average expansion since World War II has lasted 58 months. Unless someone has repealed the laws of economics, sooner or later, we’ll experience another recession.

There is a widespread belief among economists that the longer and stronger an expansion lasts, the more complacent people get about the chances of anything going wrong. They take greater financial risks, misallocating capital and seeding the next financial crisis and recession. Compound inevitable investor greed and folly with years of highly stimulative central banking policies in the U.S., Europe, and Japan that expressly encouraged people to take more risk — resulting in unprecedented borrowing and debt accumulation around the world — and the global economy could be cruising for a major bruising. When the next recession comes, it could be a doozy.

How would another 2008-scale recession impact state government finances here in Virginia? Someone asked that question of Virginia Finance Secretary Aubrey Layne, and he gave an answer at an Oct. 25 hearing of the Senate Finance Committee. (You can hear his remarks here. Go to the 23-minute mark.)

Layne emphasized that he knows of no mainstream economist who is predicting such an event, at least not in the next 24 months. But the fiscal consequences would be cataclysmic. Virginia’s General Fund budget would experience three years of what Layne, in his understated manner, described as “fairly significant” declines in revenues:

Year 1 — $2.6 billion
Year 2 — $3.7 billion
Year 3 — $3 billion

Those numbers are cumulative. The declines would total $9.3 billion over the three years. As a point of comparison, the FY 2019 General Fund budget is a bit more than $20 billion. That wouldn’t be a mere budget crunch. It wouldn’t cause routine pain and hardship. It would mark the end of state government as we know it. It would unravel the social fabric.

As Layne noted, Virginia has limited policy “levers” to pull to counteract such a drastic revenue fall. The Commonwealth is prohibited from running deficits, and it can’t print money. The state has about $1 billion in reserves — that would get wiped out in the first year. 

Broadly speaking (this is my analysis, not Layne’s), Virginia has three options: raise taxes, cut spending, or engage in fiscal sleight-of-hand. Higher taxes would reduce the state’s long-term economic competitiveness, crippling the state in the long run. As for cutting spending, many argue that the state is already under-investing in key areas such as K-12, higher education, mental health… and the list goes on. So-called “unmet needs” are limitless.

That leaves fiscal sleight of hand. Remarkably, Virginia has retained one of the gimmicks it adopted during the last recession — the “accelerated sales tax,” in which the state compels large retailers to accelerate payment of the sales tax by a month. That created a significant bump of revenue in 2010 when the state needed it most. But budget makers never fully unwound the measure. Lawmakers, suggested Layne, might consider reverting to the traditional way of collecting the tax. (Total state sales tax revenue this year is projected to be around $3.5 billion. Unwinding the accelerated payment, I presume, would entail foregoing about 1/12th of that sum, about $300 million.)

The state also could do what it did from the last recession, short-changing payments to the Virginia Retirement System and paying back the balance over time. But this time around, we’d be ten years closer to actually needing the money to pay for the pensions and healthcare benefits promised to the latest wave of retiring state employees. Borrowing from the VRS at this point would be reckless in the extreme. Without getting into specifics, Layne suggested that legislators might want instead to “look at” the retirement benefit plan obligations.

One other option would be to refrain from issuing long-term debt. Virginia tends to borrow up to the limit of its bonding capacity. (To preserve the state’s AAA bond rating, bipartisan policy dictates that debt payments not exceed 5% of General Fund revenue). Exercising self-restraint now would preserve the state’s debt-issuing capacity in the event of a major revenue downturn.

The Northam administration is preparing its budget recommendations for the next fiscal year, and legislators will have a lot of their own ideas on how to modify it. Virginia will benefit from windfall revenues from a variety of sources, and likely run a budget surplus, too. This may be one of Virginia’s few remaining opportunities to put its fiscal house in order before another recession. Failure to prepare for the inevitable downturn would be unforgivable.

Moody’s: Virginia Local Government Credit Quality Healthy despite High Debt Burdens

Moody’s bond ratings for 28 cities and 38 counties in Virginia. Source: Moody’s. (Click for larger image.)

Moody’s, the bond-rating firm, has disseminated a new report on the credit quality of Virginia local governments — answering many of the questions we have been posing on this blog.

The good news is that Moody’s rates Virginia’s business climate highly and says that local governments have “wide latitude” to protect their bond ratings by raising taxes and cutting expenses.

The bad news is that local-government flexibility to raise property tax rates might reassure bond holders but is not a prospect that taxpayers will relish. Which raises the question: How likely are local governments to raise property tax rates? Moody’s does not get into that, but it does observe that that Virginia local governments have high debt burdens, big pension obligations, and aging infrastructure to contend with.

For your reading pleasure, I have extracted verbatim the high-level conclusions from the Moody’s report:

  • High debt burdens can constrain local governments’ financial flexibility. In general, Virginia local governments have debt burdens that exceed national medians, largely due to debt issued for schools. High debt burdens lead to higher-than-average fixed costs, including debt service, the annual required contribution for pensions, and the “pay-as-you-go” portion of retiree health benefits. In turn, local governments’ flexibility to raise funds to address capital needs faces limits.
  • The federal government’s major role in Virginia’s economy is a strength but carries some risk of cutbacks. The state is home to the world’s largest naval base and the Pentagon as well as a number of non-military operations. In 2016, it ranked first in the US in military spending as a share of gross state product (11.8%). While the Hampton Roads and Northern Virginia economies benefit from the large federal government presence, both face exposure to federal budget reductions, though massive cuts are unlikely.
  • Continued private-sector investment will boost revenues and provide stability. A highly education workforce, weak union protections and significant population growth will continue to generate private-sector expansion. The expanding private sector will fuel tax base growth and provide a stabilizing factor in case of cuts in military and other federal government spending. Virginia has experienced a substantial bump in Eds and Meds with the higher education and healthcare industries consuming a greater share of employment.
  • Legal framework helps local governments maintain solid reserves. Cities and counties can raise property taxes, their largest revenue source, without state-imposed caps or voter approval. The ability to control the tax rate, along with flexibility to reduce personnel costs, has contributed to strong financial positions. However, operating funds include school operators, so reserves generally trail national medians.

I’ll provide details in future blog posts.

Virginia Ill Prepared to Weather a Recession

Thin ice

I’m not sure how Virginia’s Secretary of Finance, Aubrey Layne, sleeps at night. He is by nature a fiscal conservative, and he was in frequent touch with the rating agencies that threatened earlier this year to downgrade Virginia’s prized AAA bond rating. While elected officials may ignore the fiscal warning signs, it’s Layne’s job to pay attention to the warning signs. They’re coming fast and furious.

In recent days, I have drawn attention to analyses by Truth in Accounting and the Mercatus Center that have highlighted the precarious nature of the Commonwealth of Virginia’s finances. Now come new warnings from bond-rating firms S&P Global Ratings and Moody’s Analytics. As reported by Reuters:

While U.S. states’ financial health has strengthened in 2018 compared with last year, fewer than half have enough financial reserves to weather the first year of a moderate recession, according to an S&P Global Ratings report on Monday. …

Only 20 states have the reserves needed to operate for the first year of an economic downturn without having to slash budgets or raise taxes, S&P said.

Meanwhile, from Moody’s Analytics:

A Moody’s Analytics report, also released on Monday, said the number of states with sufficient reserves to withstand a recession increased to 23 from 16 last year.

However, that leaves 27 states lacking sufficient reserves. And who might they be? According to Moody’s (my emphasis):

Those states, in order of least-prepared, are Louisiana, Oklahoma, North Dakota, New Jersey, Montana, Kentucky, Virginia, Missouri, Arizona, Illinois, Pennsylvania, Wisconsin, Kansas, New Hampshire, Mississippi, Michigan and Arkansas.

More than nine years since the end of the 2007-2009 recession, and Virginia is one of the states least prepared to weather an economic downturn?

Virginia has a rare chance to put its fiscal house in order. We’re benefiting from a trifecta of (1) a temporary acceleration in economic growth and tax revenue, (2) a windfall from the federal tax cut, and (3) a windfall from the ability to start collecting a tax on Internet sales. Some people say, whoopee, let’s spend the windfalls! Others, including my esteemed colleague Steve Haner, say, let’s give it back to the taxpayers. I have yet to hear anyone (other than myself) say, let’s use the windfalls to pay down liabilities, build up reserves, and generally strengthen Virginia’s financial condition.

This is easy money. If we spend it or give it back, I can guaran-damn-tee you that a time will come when we’ll wish we’d set it aside for when we really needed it. Cutting spending and/or raising taxes at that time will be very painful.

Virginia Unfunded Liabilities: $5.4 Billion

Source: Truth in Accounting

Here is more confirmation, as if any were needed, that the Commonwealth of Virginia is running hidden deficits in the form of unfunded pension and retiree healthcare liabilities… Truth in Accounting, a nonprofit devoted to transparency of government finances, gives Virginia a grade of “C” for its financial practices.

By the standards of the 50 states (and District of Columbia), that’s not a bad score. Virginia’s unfunded liability averaging $1,900 per taxpayer is less onerous that that of all but 11 states. So, if you’re inclined toward Pollyanna-ish views on government finance and debt, we’re not doing so badly.

But here’s what Truth in Accounting has to say in its Virginia profile: “Virginia’s financial condition is not only disconcerting but also misleading as government officials have failed to disclose significant amounts of retirement debt on the commonwealth’s balance sheet. Residents and taxpayers have been presented with an unreliable and inaccurate accounting of their government’s finances.”

Highlights:

  • Virginia has $35.8 billion in assets to pay $41.2 billion worth of bills.
  • The $5.4 billion shortfall averages $1,900 per taxpayer.
  • Despite reporting all of its pension debt, the commonwealth continues to hide $936.9 million of its retiree health care debt.
  • Virginia’s reported net position is inflated by $1.5 billion, largely because the commonwealth defers recognizing losses incurred when the net pension liability increases.

The best funded states are Alaska ($56,000 surplus per taxpayer), North Dakota, Wyoming, Utah, and South Dakota, all of which have set aside more than enough money to pay their pensions and retiree healthcare liabilities. The top “sinkhole” states are New Jersey ($61,400 debt per taxpayer), Connecticut, Illinois, Kentucky, and Massachusetts.

Remember, the Truth in Accounting methodology does not take into account hidden deficits in the form of maintenance backlogs on roads, bridges, mass transit, school buildings, water and sewer plants, etc., much less the potential liability associated with rising sea levels. Nor does it cover the liabilities associated with local governments or a welter of independent and quasi-independent authorities. The fiscal health of the Commonwealth and its localities is far more precarious than even Truth in Accounting portrays it.

The national debt now exceeds $21 trillion, and I read recently that the federal government has unfunded liabilities of roughly $100 trillion over 30 years. Yet Democrats are campaigning on expanding entitlements (Medicare for all, free college for all, etc.) while President Trump is promising another round of middle-class tax cuts. Both political parties are in total denial. The federal budget is unsustainable, and when the national government can no longer maintain its promises and breaks its social contract, and the country slides into chaos, state governments will be the main line of defense against anarchy.

Hint: Do not even think about moving to New Jersey or Illinois. Alaska is looking pretty good right now. Grizzly bears don’t riot or throw Molotov cocktails.

Caution: These Links Will Ruin Your Sleep

A campaign pitch for an incumbent member of Congress you will not hear:  You are getting $4 worth of government for every $3 you pay in taxes and fees, and the other buck is piled on as debt for your kids and grand kids to pay! You should vote me back in!

The Treasury Department’s own news release Monday, flagged by The Republican Standard,  attempted the spin that this is not the fault of President Donald Trump and the halcyon days coming thanks to his wise policies will soon begin to reverse this.  Hang with us!  Reading through the actual reports on income and spending, however, it is impossible to build up any hope.

This is another one of those cases where I indulged my own morbid curiosity and am now sharing the results.  I do not spend much time with the federal reports, compared to the state spreadsheets, but from time to time everybody should dig into the depressing details.  Stop reading my observations and dive into the actual reports – I won’t be offended.

The federal budget is broken into two big categories:  on budget and off budget.  This in no way correlates to the state’s system of splitting things into general fund and non-general fund.  The federal off-budget component is mainly Social Security pension and disability payments.   Other situations where specific taxes or fees pay for specific programs, including Medicare and the Post Office, are lumped into the on-budget categories.

When Social Security was collecting healthy receipts exceeding its annual outlays, it was producing surpluses.  These off-budget surpluses provided a nice way to hide the true size of the deficit in the on-budget category.  Well, for federal fiscal year 2018 (which ended September 30) that was a very small fig leaf indeed – about $6 billion, compared to $49 billion the year before.  Will the current fiscal year 2019 produce the first cash flow deficit for Social Security?  Will that wake up anybody?

When you back out that small off-budget surplus, the on-budget deficit was $785 billion, just under 25 percent of the $3.26 trillion in on-budget spending.  That on-budget deficit grew $70 billion, almost ten percent in a single year.  You can choose whether to blame higher spending or tax cuts.  Machts nichts.

The big federal tax cut went into effect three months into this past fiscal year and was in play for nine months, but individual income tax receipts grew 6 percent for that year.  Perhaps it’s too soon to judge the impact until people file next year.  But the impact of the corporate income tax changes did show up last year, with a $92 billion (31 percent) drop in CIT revenue.  There was a healthy boost in customs duties and that will really take off for 2019. (Is that the plan? Make tariffs the main source of federal income for the first time since President Polk?)

The federal officials quoted in the official release make much of slight decreases in a couple of social benefit programs, such as SNAP (a.k.a. food stamps), but reviewing the spending sheets really reveals the depth and breadth of income-based transfer programs, plus the political genius of sprinkling them through so many difference parts of the budget.

SNAP and other food programs are in the Agriculture Department ($91 billion).  Federal student aid ($46 billion) is in Education.  Medicaid ($389 billion), Temporary Assistance for Needy Families ($21 billion) and Children’s Health Insurance Program ($17 billion) are in Health and Human Services.

Housing gets its own programs for the economically challenged ($48 billion).  The Earned Income Tax Credit ($59 billion) is buried under the Treasury Department and the Social Security Administration handles the Supplemental Security Income payments of cash ($55 billion) that are not part of the regular disability coverage, which is (of course) off budget.  I’m sure I missed some.  I think the Veteran’s Administration still makes some pension payments based on poverty (maybe not.)

A single Department of Federal Need-Based Assistance which puts all those programs in one basket would approach $800 billion and would be larger than defense spending or the payments on the debt ($521 billion).  Which of course is why no politician of either party will ever, ever do that and make things that clear.

What is the choice on November 6?  There really is no reason to differentiate the parties on this issue any more, or to believe any candidate promising something else.  A bipartisan deal on Fiscal Year 2019 explodes spending and the projected deficit this year approaches $1 trillion. We are in this condition in a strong economy and looking at the deficits run coming out of the last recession indicates the deficits in the next one (inevitable) will approach $2 trillion.

Chesterfield’s $50 Million Fiscal Landmine

Virginia and its local governments are constitutionally obligated to balance their budgets ever year. But as I have repeatedly pointed out, there are many ways to duck that obligation. One is to rack up unfunded pension liabilities. Another is to under-fund maintenance.

Today we discover that even a highly reputed county with a AAA bond rating can engage in fiscal sleight-of-hand. From today’s Richmond Times-Dispatch: “Chesterfield County needs $50 million for school maintenance problems that could keep kids out of schools if they are not addressed soon.”

The county issued $300 million in bonds after a voter-approved referendum in 2013 to replace and renovate county schools. Apparently, there’s only $13 million left for fixing facilities — far short of what’s needed.

Dan Champion, a program manager for the firm EMG, said there are schools across the county with serious electrical, air conditioning and roofing problems. If not adequately addressed over the next two decades, the cost of the repairs could rise to nearly $1 billion, he said.

The Times-Dispatch article delves into the riff between the county administration and the school system. There’s a lot of finger-pointing going on. Regardless of who is to blame, it is clear that Chesterfield schools have run $50 million in maintenance deficits over the years. And now the county is on notice that, absent corrective action, the maintenance deficit could reach $1 billion over 20 years.

How many other Virginia school districts have engaged in deficit maintenance spending? How many other agencies and localities have piled up unfunded liabilities for deteriorating roads, highways, bridges, mass transit systems, water and sewer plants and pipelines, libraries, administration buildings, courthouses, jails, prisons, municipal gas systems, IT systems, automotive fleets, and the rest of the state’s vast infrastructure?

Administrators and elected officials have no interest in knowing the truth that might make them look bad. So, nobody tracks this information until it becomes an explosive issue. What’s that noise we hear in Chesterfield? Kaboom!