Desperate Times...Desperate (Insane) Measures?

Insanity: Doing the same thing over and over again and expecting a different result. - Albert Einstein

Walking back from the post office to my office earlier this week, I noticed this article on the front page of the USA Today: "States Counting on Cheap Credit to Avoid Spending Cuts"

Really? Dig the hole deeper?

I should not be surprised I suppose. The politically expedient answer to avoid spending cuts is often to bring out the old credit card once more. And who wouldn't when you can get interest rates below what you can earn in a savings account.

Still, this can't be good. If we're talking refinancing out of higher interest debt, I can see it. But use more debt to cover spending that we already can't afford? And for which we have no real plan for paying it off when the debt comes due?

I'm sure there are those who would defend it by saying that we'll come on better times soon, tax revenues will increase once again, and we'll be able to payoff these debts shortly. But at what point do such hopes become irresponsible?

Just when you might have thought things couldn't get any worse, I see this comically tragic piece:

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Arizona State Capitol Building for Sale
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It discusses a plan in Arizona to sell public buildings for $735 million only to guarantee that the state will lease them back over 20 years at a cost of $60-70 million per year (total over 20 years is $1.2-1.4 billion). About 2/3 of the way through this video, the state senator is asked what happens next year when the state can't sell the buildings again PLUS they are now making $60-70 million in payments they didn't have before? Her answer? "Do you have a better idea? See, that's always the problem, but you know, we gotta get through this will help us bridge the gap for this year."

So we kick the can down the road a bit further....

I'll come back to a thought I had when working on a "Hazard Mitigation Plan" for a county near where I live. The idea of these plans was to think ahead and decide how we'd handle certain emergencies - what resources would get marshalled? What county staff would be reassigned during the emergency to handle what tasks?

For another example of prudent planning, I talked to a businessman once who works in property management. Having lived through previous "corrections" in the market, he told me how he tried to ensure that he could weather a 20% downward correction in his properties values should that happen again - which he figured it would eventually.

What if states and local governments had such a mentality about their budgets? Sure, many of them maintain reserve funds, but these are genearlly aimed at covering short term mismatches between when revenues arrive and expenditures are due - or to cover costs associated with natural disasters or some other emergency situation. Some of the more prudent local governments may use their reserve funds to save up for certain projects rather than borrowing for them.

But none of these addresses the true problem that I am focused on here - the sudden, sustained drop in the basic source of tax revenue. For states, this would primarily be income and sales taxes. For local governments it is property taxes and to a lesser extent (but not insignificantly) state aids to local governments. Do any states or local governments develop a plan for what they would do should their revenues drop by 20 percent? By 30 percent? What if all your state aid were suddenly wiped away and wasn't going to come back for at least 10 years? As they develop their budgets are they prioritizing their programs and expenditures in a way that allows them to pare back in an orderly manner and that doesn't destroy the community?

I'm sure there would be those who'd say this is an unnecessary exercise - why would we plan for something that only happens once every 20 or 30 years? And even if we did create such plans, who is to say that the plans would be followed anyways? Probably true. But I wonder if the mental exercise of saying "OK, here's our budget. Now, let's assume revenues fall by 10% - what are we going to cut first? Let's say they fall 15% - what are the next round of cuts?" Wouldn't that be a bit better and more honest?