Around the country it's estimated that state deficits this year will exceed $100 billion -- about $350 for everyone in your household and on your street. Among the maimed and injured jurisdictions we have California with an estimated $35 billion deficit, Texas ($10 billion) and Wisconsin ($3.2 billion).

What happened to once-robust state budgets?

Two items on anyone's list would include the economic slowdown seen during the past three years and huge investor losses stemming from the meltdown on Wall Street. To some extent, of course, massive stock losses are also responsible for the first item.

About Wall Street. Remember the good old days, say March 2000, when stock market measures were soaring, Internet stocks were said to be where fortunes would be made and real estate investing was the last place to put your dollars? Depending on who you ask, values on Wall Street have declined some $5 trillion in just the past three years. Write-off $5 trillion from state income rolls and at 6 percent it means tax collections have been reduced by $300 billion.

Hmm -- now let's see, where o'where could the states find $300 billion or something close?

One obvious idea would be to raise local property taxes, the major source of state funding. But let's be creative. Property owners are already over-taxed, taxing homeowners is not a smart political idea, and there must be some sector of the economy with a few billion dollars to spare....

Consider the tobacco settlement. It produced an agreement to pay the states $206 billion over 25 years because of the costs to state healthcare systems which have resulted from smoking.

Can the same concept apply to Wall Street? The $1.4 billion settlement announced last week between 10 firms and federal and state regulators could be just a start. While the allegations "were neither admitted nor denied by the firms" according to a joint statement from the Securities and Exchange Commission and others, surely state governments -- like many investors -- must wonder if they should seek further damages because of the various practices now being revealed.

While investors, pension funds and states lost trillions of dollars in value, a lot of money remains available to resolve claims should Wall Street lose in court.

According to the Securities Industry Association (SIA), the industry had pre-tax profits of $6.9 billion in 2002, $10.4 billion in 2001 and $20.1 billion in 2000. These numbers don't tell the whole story because pre-tax profits represent only the money that exists after expenses, profits calculated after the payment of bonuses.

Are bonuses -- presumably rewards for superior results -- really that large? You bet. Alan G. Hevesi, the New York State Comptroller reports that Wall Street "bonuses totaled $7.7 billion in 2002, down from $12.6 billion in 2001 and a record $19.4 billion in 2000."

In other words, pre-tax profits on Wall Street from 2000 through 2002 totaled $37.4 billion while bonuses amounted to $39.7 billion. Absent huge bonuses, Wall Street taxable "profits" would have been twice as big -- and far more than the $1.4 billion settlement negotiated last week.

The argument is made that to restore investor confidence in the stock market little more should be done, that Wall Street has been chastised and that a new investment era is dawning.

Yeah, right.

A better way to restore investor confidence would be to fully air what happened and -- if appropriate -- seek compensation where misdeeds and harm can be shown. If successful, such challenges may mean smaller bonuses, no bonuses and even a few failures on Wall Street, but in pursuit of the full story such results would be fair, reasonable and a whole lot better than once-again raising local property taxes.

For more articles by Peter G. Miller, please press here.

Published: May 6, 2003

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