While plenty of attention has been focused on Greece, Spain and Portugal, spare a thought for the finances of American states. They are teetering on the edge of bankruptcy. The American PIGS will be out in force.
In a report, the Pew Center for the States has revealed a $1 trillion gap between the $2.35 trillion states and participating localities had set aside to pay for employees' retirement benefits and what they will actually have to pay. Alarmingly, eight states – Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia-have more than one-third of their total liability unfunded and two states – Illinois and Kansas – have less than 60 percent of the necessary assets on hand to meet their long-term pension obligations: Indeed, Illinois is in the worst shape of any state, with a funding level of 54 percent and an unfunded liability of more than $54 billion.
Meanwhile, New York's budget is more than a month late so it will need emergency funding and California, the world's fifth largest economy, is going from bad to worse with state revenues plunging.
Joshua R. Rauh, associate professor of finance, Kellogg School of Management, Northwestern University says the major Illinois pension funds will run out of money by 2018.
Now, the US Federal Government will not allow any state to default and would be there to serve as a backstop. But chances are it will tell the states to cut their budgets and bring in their own austerity measures.
What's happening in Europe now, with the EU forcing Greece to cut deep, could be a sign of what's ahead for the US economy. The American PIGS are coming.
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