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  • Looming Crisis: State Budgets Soon to Be Under Siege

    Today in Outside the Box we explore the very sad fact that once again I was unduly optimistic. My good friend Ed Easterling shows that it is quite likely that the pension shortfalls are approaching $4 trillion. And the longer we wait to deal with the problem, the worse it will get.

    The biggest part of the problem, as I wrote back in 2003, is unrealistic assumptions about future investment returns. That has not changed. You can find consultants who will tell you there is “only” a $1 trillion problem. However, if you assume that interest rates will remain low and equity returns will look like they did the last ten years, then the underfunding might look more like $4.6 trillion.

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  • Recession Continues to Batter State Budgets; State Responses Could Slow Recovery

    There were a lot of questions last week when I wrote about public pensions. So for this week’s Outside the Box, I offer you some more information about how bad the state deficit situation is, and for your specific state. States are having to cut more than 1% of national GDP in fiscal 2011, as federal stimulus money is slowly drying up. And that is just states. Local municipalities and schools have a similar problem. And then add on the possibility of the Bush tax cuts going away and that is a very serious situation. It is why I am so concerned and vocal about the need for the Bush tax cuts to be extended for at least one year until the economy is growing above stall speed. The headwinds from cities and states are severe, as you can see.

    Basically, the states were profligate going into the downturn, and they have enormous costs going forward, so even for 2011 and 2012 they are going to have massive budget deficits. Some, like Illinois and Nevada have shortfalls of 40-50%. That is simply not sustainable.

    The research is from the Center on Budget and Policy Priorities at http://www.cbpp.org/cms/index.cfm?fa=view&id=711 . for those in the US, I think you will find it interesting to see how your state is doing. For those outside, look and see how much the problem is in terms of GDP and realize what impact that is going to have on the overall US economy.

    I am at the airport in Omaha with Trey on a trip looking at schools, and on to Illinois tonight. It is a lot cooler here than in Dallas, at least.

    Your data watching analyst,

    John Mauldin, Editor Outside the Box

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