‘Functionally Bankrupt,’ But Honest About It

A guy told me the other day that he is “functionally bankrupt.” He has around $57 billion in outstanding debt (it takes awhile to add it all up), but he’s planning to borrow $5 billion more in the next year or so.

Would you like to lend him some of that money? I wouldn’t.

The guy is New York Gov. Andrew Cuomo. In his budget message to the state Legislature this week, Cuomo laid out the plain truth that the Empire State’s finances are broken. Not just gummed up by recession and unemployment, but bent-pushrod, blown-gasket, dead-tranny busted. Broken in the way that makes auto mechanics giggle while they write up a repair estimate.

To his credit, Cuomo isn’t laughing. He seems to want to make the necessary repairs, and he knows he has to do it while the vehicle keeps moving. After all, you can’t take an entire state government off the road while you bring it in for a fiscal overhaul.

Or maybe you can. If New York gets shut out of the credit markets, the state could come to a halt very quickly. Which brings us back to the question of why any lender would help anyone, whether an individual or a government, who is already scalp-deep in debt and who will immediately add new borrowings to an ever-growing pile of IOUs.

Cuomo can’t fix New York by himself. He needs help from the Legislature, or at least from two legislators. Assembly Speaker Sheldon Silver and Senate Majority Leader Dean Skelos call the shots in their respective houses. But the lawmakers, particularly Silver, don’t think the jalopy needs fixing. They seem willing to let it keep wheezing down the road to financial ruin just as long as it can.

New York does a lot of its budgeting on cruise control. Legislative formulas govern increases in Medicaid funding and school aid, which are the state’s two biggest expenses. Generous formulas also determine raises for many of the state’s nearly 200,000 employees. About one-third of those employees are paid through the scores of public authorities that are not even part of the governor’s budget.

New York does a lot of its legislating on cruise control, too. There are 150 members of the Democrat-controlled Assembly, and 62 denizens of the Republican-held Senate, yet only Silver and Skelos really matter. Leaders of the majority in each house have wielded iron fists for decades, controlling the pay (through committee and leadership assignments), pork and patronage on which the other members handsomely subsist. In return, the other members vote as they are instructed – especially on important matters like the budget.

Frank Sinatra sang in “New York, New York” that “If I can make it there, I’ll make it anywhere.” Well, if you can’t make it among the world-class talents of New York business, culture, letters or law, you can probably make it in the New York political clubhouses. Brains and talent are not disqualifiers for candidates for this Legislature, but they are not prerequisites, either.

So New York has a laughingstock Legislature and a chronically dysfunctional government. Oh, and did I mention that it wants to keep borrowing money?

The state spends more on Medicaid than Texas and Florida combined, even though each of those states has a larger population. A lot of that spending is pushed down to the county level, helping to give New York some of the nation’s highest property taxes to go along with its high income taxes. Every year’s budget season brings new proposals to bring Medicaid and education spending back to reality, but every year the unions representing teachers and hospital workers launch an advertising campaign to keep the Albany gravy train going.

In his budget message, Cuomo demanded that the Legislature put a stop to the budgeting nonsense. He wants to cut the state’s general spending for the first time in 17 years, and threatened to lay off nearly 10,000 workers if public employee unions do not make concessions. To Silver’s disappointment, the governor refused to call for new taxes or to back the extension of a “millionaire’s tax” (which actually applies to individuals earning more than $200,000 a year or couples with incomes of more than $300,000) that expires at the end of 2011.

But Cuomo did call for more aggressive enforcement of the state’s existing taxes. Anyone who has dealt with the state’s tax collectors, as we do at our firm, must be wondering how they could be more aggressive short of inviting us to settle disagreements in the nearest alley.

Cuomo is trying to plug a $10 billion hole in the state budget for the fiscal year that begins April 1. New York is not alone, of course. Bloomberg News this week cited an estimate from the Center on Budget and Policy Priorities that states this year face a total of $125 billion in budget shortfalls.

California Gov. Jerry Brown, a Democrat like Cuomo, faces a $25 billion budget gap. He wants voters in that state to sign off on $12 billion in tax increases to accompany a roughly equal amount in state budget cuts. Illinois legislators recently passed a package of tax increases that still did not plug the gap in that state’s budget. New borrowing and sunny assumptions are supposed to make up the difference.

Cuomo does not propose to borrow money to cover next year’s operating expenses, but the state will be heading back to the bond market to raise more than $5 billion in capital spending. The state’s bond obligations by next year are projected to rise to $58 billion, which implies net new borrowing this year, after repayment of outstanding obligations, of about $1 billion. But the state’s true debt, spread among all those authorities and buried in unfunded obligations to the hundreds of thousands of employees who will someday retire, is far higher.

I think it’s ludicrous to buy a bond from a government like this. I want to lend as little money as possible to New York and the other free-spending prospective deadbeat states, and I want to lend it for as short a term as possible. New York probably can muddle through this year, as it has so many others. Maybe next year too. But sooner or later, this unsound structure has to collapse. I don’t want to have my money inside when it does.

We have it straight from the guy who knows best: This government is bankrupt in all but name. So, do you want to lend it more money before it gets its financial house in order?

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

1 Comment on ‘Functionally Bankrupt,’ But Honest About It

  1. “dead-tranny busted.”

    Now let’s face it: who do the ‘mob au populaire’ want to kill more these days – ‘trannies’ or bankers?

    Belonging to one of these groups I know which one’s more responsible for the current tragedy we’re in.

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