The Ultimate Solution to the US Debt Crisis

At long last, we’ve figured out how to solve the US debt crisis. Get ready for it…

Weekly emergency legislation.

Ta-da! (Confetti drops, crowd cheers. The band strikes up John Phillip Sousa.)

Yesterday marked the 11th week in a row the New York State government postponed closing their $8 billion budget gap with emergency legislation.

It’s a great scheme. You see, they can make big speeches and debate on the bills due next month… Which budgets to cut, who to fire, who to tax, etc. But bills due tonight? Next week? The one thing the whole state can get behind is keeping the lights on for the next few days. So once a week, the legislature gets together and passes an “emergency spending bill” to stave off disaster…the same disaster they encountered the week before, and before that, and last month…last year.

And so it goes. “I think we’ll have to do it again next week,” Gov. Paterson warned yesterday after the latest “emergency” bill.

Bravo, we say. If we can live in a state of perpetual emergency for the rest of our lives, we’ll be set!

Similar shenanigans in the Golden State:

“In all likelihood, we’re not going to have a budget plan forwarded on to the governor by the constitutional deadline,” California Controller John Chiang lamented yesterday. He and CA legislators have a $19 billion budget gap to close by July 1…no way, Jose.

But just like New York, it’s no big deal. The California governor has delivered an on-deadline budget only 10 times in the last 30 years, according to Bloomberg data.

“Municipalities are struggling to cut spending in line with lost revenue,” reads our latest issue of Apogee Advisory, which hit virtual newsstands yesterday. “But their biggest expense of all is untouchable – pension plans.

“California offers a great example. A recent Stanford study concluded that the state pension fund program is underfunded by roughly $500 billion. The researchers urged Gov. Schwarzenegger to inject $360 billion into its public benefit systems – right now – to have an 80% chance of meeting 80% of obligations over the next 16 years.

“Facing a $19 billion state budget gap, what can he possibly do?

“The problem, just like with subprime, is an irrational form of leverage. In essence, municipalities borrow current earnings of public employees in exchange for some of the most favorable retirement plans in the world. That borrowed money is invested aggressively, just like a private-sector employee would in his 401(k).

“Except if the fund loses money, which they all have over the last 10 years, pension funds don’t adjust payouts. The social and political pressure to maintain the status quo – keeping our public employees comfortably retired – is just too strong. So municipalities kick the can down the road. New employees buy into the funds. Fund managers maintain their projections of endless 8% annual returns. Retirees keep taking out the funds they were promised…and no one pays the tab.

“And it’s not just California. Orin Kramer, chairman of New Jersey’s pension program, estimates a national funding gap around $2 trillion.”

Ian Mathias
for The Daily Reckoning

The Daily Reckoning