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What’s the impact of the meltdown in your state?

ASK THIS | September 17, 2008

Wall Street sold an enormous amount of doubtful derivatives to state pension funds. What happens now?

Q. The Wall Street melt down will have a major impact on various state pension funds. Reporters should ask: Will the result be cuts in spending on education or infrastructure and the like, or will it be higher taxes, or what? Something has got to give.

Q. In some instances there may have been misrepresentations in the sale of derivatives or commodities trades to pension funds. Reporters should find out: Did that happen in your state?

By Martin Lobel

While the media are focused on the carnage on Wall Street, there is an aspect of the meltdown that is not being reported – the impact on the states. Wall Street sold enormous amounts of doubtful derivatives and commodities trades to state pension funds. The pension funds bought these deals because they were assured they provided higher returns at minimal risk, allowing them to fund their obligations without increasing taxes.

This is a story in every state, for every news organization.

No one really knows the extent of the shortfall in assets needed to meet states’ obligations to their pensioners, but it is clearly significant. Some states were facing large deficits even before this week’s collapse and, unlike the federal government, they cannot make it up by simply printing money.

This comes at a time when State governments are increasingly being squeezed by rising costs and lower tax receipts. Something is going to have to give. Will it be education, infrastructure repairs, etc. or will they have to impose higher taxes at a time when most states are in a bidding war offering tax breaks to get new businesses into the state.

Journalists should start asking some hard questions now about what alternatives are being considered so the public understands what is at stake when the choices come up for a vote. They might also consider asking whether material misrepresentations were made in the sale of these derivatives or commodities trades to the pension funds.

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