Friday, August 1, 2008

State Fiscal Pressures

Sacramento California capital buildingWe all know about the fiscal problems at the federal government level, but what about the state level? Well, things aren’t looking too good on that front, either. Most states are running a deficit, but unlike the federal government, these states can’t just print more money when they need it. Because of that, many states are being forced to dramatically cut back services and lay off workers and/or substantially cut their pay. Things at the state level are getting worse quickly, so investors definitely should keep up on this information. To help with that, the Center on Budget and Policy Priorities published a fiscal pressure ranking for the states.

To determine their rankings they looked at three variables: employment, Poverty and the housing market. The following are quotes from the report detailing the reasons they chose each variable:

  • Employment: Changes in employment are closely related to changes in state income and sales tax collections. If fewer people are working, there will be less income tax revenue and also less consumption.

  • Poverty: Change in the number of food stamp recipients is the single best early warning measure about what is happening to poverty in a state. If the number of food stamp recipients is increasing, the poverty rate generally is rising, and there likely also will be higher enrollment in Medicaid and SCHIP, as well as increasing pressure on other programs that serve the poor and near-poor.

  • Housing Market: Change in the foreclosure rate is related to sales tax revenues, both because people who feel they are losing home equity value are likely to reduce their consumption and because there is less direct purchase of building materials and home furnishings.

According to their rankings the five states in the worst fiscal shape are Florida, Arizona, Nevada, Rhode Island and California. The five states in the best fiscal shape are Texas, Louisiana, Oklahoma, Nebraska and Kansas. The full rankings can be seen in the report. The lone surprise to me in these rankings is Rhode Island. I had no clue Rhode Island was in such distress, I guess because they are so small, they kind of slide under the radar.

Perhaps the clearest example of state fiscal problems can be witnessed in California. Thanks to budgetary issues, Governor Arnold Schwarzenegger announced yesterday that the state would be laying off thousands of part-time workers and cutting pay of around 200,000 workers, all the way down to the minimum wage of $6.55, according to the Los Angeles Times. They say this is only a temporary pay cut, though, until a new budget can be agreed upon and signed. The problem is that Republicans and Democrats disagree on the best way to fix the deficit in California’s budget, and neither side is willing to budge. The Los Angeles Times quoted Schwarzenegger as saying, “I have a responsibility to make sure that our state has enough money to pay its bills….It is a terrible situation to be in. I don't think any governor wants to be in this situation. . . . But this is really the only way out at this point." In this quote, he was speaking about the executive order to cut the jobs and reduce the pay of the 200,000 workers.

As one can imagine, the fallout from this order will likely be hard felt. There are not too many people who can make it in any state, let a high-priced one like California, on $6.55 an hour. With the housing crisis already being felt across the state, this is just one more blow that they really didn’t need. While this situation is so far unique to California, budget deficits are not. More than half the states are running budget deficits right now, and since they can’t print money, their debt levels can only go so high before cuts are forced upon them. Over the next year or so, look for a slew of cuts from the state level, and of course don’t forget about the cities; they are in the same boat (see Vallejo bankruptcy).

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