Last week, we looked at Trimtab’s erroneous read of Federal Withholding Taxes.
This week, let’s take a look at how the States and Local governments are doing with their tax base. Let’s start with a chart of non-Federal deficits, as highlighted this April 15th in The Gartman Letter:
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STATE AND LOCAL BUDGET DEFICITS
Billions, 1965 – Present
Chart courtesy of Stephanie Pomboy, MacroMavens.
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The chart above shows a steady deterioration in the balance sheets of the states and cities of the US since the late ’90’s. Dennis Gartman notes that "Cities and states cannot run budget deficits without issuing revenue anticipation notes and the like to try to balance their budgets, and for a time those stop-gap measures will work… with the operative words here being "for a time."
As consumers spend less, the decrease in economic activity is leading many individual states to have their own recessions:
"The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that’s true for the nation as a whole, a survey of all 50 state fiscal directors concludes.
The situation looks even worse for the fiscal year that begins July 1 in most states.
"Whether or not the national economy is in recession — a subject of ongoing debate — is almost beside the point for some states," said the report to be released Friday by the National Conference of State Legislatures.
The weakening economy is hitting tax revenue in a number of ways: People’s discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house."
One last note: Preliminary Q1 GDP data gets released on Wednesday . . .
Graphic courtesy of AP
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Previously:
Trimtabs Continues to Abuse Withholding Data http://bigpicture.typepad.com/comments/2008/04/trimtabs-contin.html
Sources:
U.S. States `Deteriorating’ Amid Slump, Lawmakers Say
William Selway
Bloomberg, April 25 2008
http://www.bloomberg.com/apps/news?pid=20601103&sid=aynsFLOt6jWE&
Many states appear to be in recession as deficits grow
ANDREW WELSH-HUGGINS
Associated Press Apr 25, 8:17 AM EDT
http://tinyurl.com/69wjfv
i just hope they don’t start taxing groceries as their way out of this fiscal problem…
I feel like having the chart/data presented in per capita form would be more useful here–California can close a billion$ deficit much easier (by easier I mean smaller spending cuts/tax raises) than, say, Montana.
Is the chart of local and state budget deficits confusingly labeled, or is it just me?
When I see a chart titled “deficits” I read the positive numbers on the Y axis as “in deficit” and the negative numbers as “in surplus.”
I just wanted to be certain this chart says what we think it says, because I was under the impression that state and local governments were awash in revenue until very recently, thanks to higher property tax income as a result of the housing boom.
Hey VM. With specific regard to California, it’s running a $16 billion deficit. I don’t see how they’re going to close that so easily. Although they have sent 20,000 teachers to the sidelines, and are about to release 22,000 prisoners. Those certainly sound like penny-wise-pound foolish “solutions.”
One of the issues, of course, with states’ balanced budget mandates is that they are profoundly pro-cyclical. That’s going to have a nasty multiplier effect on forces pushing the economy to the downside.
In the note from which the MacroMavens’chart above is taken, Ms Pomboy points out that state and local government account for 12.6% of GDP, and that with 19.7 million workers, they employ more than the manufacturing, retail, finance, or education and healthcare sectors.
Rgds.
Anyone know any reason behind the spike which then neatly returns to the trendline in 2005-2006?
I prefer municipal bonds backed by essential purpose revenues (ie water/sewer etc) as opposed to general obligation municipals for this reason.
It goes against conventional wisdom, but revenue bonds have earmarked cashflows for debt repayment, whereas GO’s are – at least theoretically – fighting for dollars, along with everyone else, in a shrinking budget.
Scott–
My example wasn’t referencing actual numbers–according the chart Montana is not running any deficit at all. My point was simply that states vary in population by orders of magnitude, and so an absolute measure is not as useful a metric when comparing deficits as per capita data.
But yes, the California budget has some serious issues.
G Milburn–
Hurricane Katrina
So, is anyone else looking forward to Countrywide tomorrow?
Another case of nothing to see here move along please.
BR – Well here we are at SP500 1400 as you called. Buy sell or hold?
I suggest looking at a fairly new piece of data, State Coincident Indexes, published by the Philly Fed. Paints a better picture as to the health of each state. The state indexes combine nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements.
http://www.philadelphiafed.org/econ/indexes/coincident/2008/CoincidentIndexes0308.pdf
It would be great to see a chart that correlates the state deficit data with market valuations in housing. It appears on first blush that Cal, Az, Fla are all in even greater trouble than this data shows since revenues on housing will likely decline.
It is interesting that the state and local governments have had budget deficits since about the time the latest expansionary cycle started in ’02 –’03 (it’s hard to tell for sure from the small chart). But they have clearly been in deficit for the entire period since then!
So with Federal budget deficits, the national debt burgeoning, and the states now in trouble too, the future looks bleak for the entire government sector, which will also impact the private sector, IMO.
As the economy slows governments at all levels will have increased needs for funds:
As unemployment rises, crime will increase, but governments at all levels won’t have the funds to put extra cops on the streets or to house prisoners.
The Iraq War costs $8 to $10 billion per month and will continue indefinitely, plus I don’t know how much for Afghanistan. http://www.nationalpriorities.org/costofwar_home
There will be a need for additional bailout / stimulus money / work programs to TRY to jump start the economy; that will easily cost $100s of billions, I assume.
Plus decaying infrastructure will put added pressure on governments to keep roads, bridges, water supplies, etc. safe.
The cost of Medicare parts A, B and D will continue to rise.
Etc.
And all these things will be mostly funded with borrowed money. Therefore, I don’t see any way long rates won’t rise in the coming months. And that, of course, is more bad news for housing specifically and the economy in general.
It does look like the graph should be labeled “Budget Surpluses” instead of deficits, as I believe that most states were flush w/ money until recently, which is what the chart would show, if re-labeled.
So far as sewer/water bonds being better than GO bonds–hey buddy, I’ve got a few sewer bonds from my home county, Jefferson, in Alabama, that I’d be glad to broker to you.
Jeffco is broke, but has not yet filed for bankruptcy, and the sewer bonds are in default. When Jeffco finally ponies up to the bankruptcy bar, that’ll be the next leg down in the “credit crunch” as it will be the biggest municipal bankruptcy, ever. We owe about $3b in sewer bonds, about $2b in other bonds. They’re all going down the tubes.
m3,
“I just hope they don’t start taxing groceries as their way out of this fiscal problem…”
Several heavily Republican states already do tax groceries. It’s sick and unbelievably punishingly regressive.
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Barry, I hope you counter the GDP yahoos (like Kudlow) with a GDP exinflation number (take out energy and ag). Last week the tv pundunts kept pounding positive earnings in 1q if you take out financials….fools.
DonKei,
I think you are right; any idea when the clock runs out?
TIA
VJ –
I assume by your comment,
“Several heavily Republican states already do tax groceries. It’s sick and unbelievably punishingly regressive.”
you mean Texas. And yes, Texas does tax some groceries. However there are some exceptions, “There are also exemptions to the sales taxes in Texas. These include medications, bakeries, meats and some other food items.”
I would much rather be in Texas where we tax some food items but have a balanced budget than in a state (California) which may not tax food but lets criminals out early and fires teachers.
Re: Jim D.,
You are not alone. That was the first thing I thought.
I have lived in Ohio for 70 years.
The last 20 have been really tough
financially since we lack financial leadership and government fiscal control. I never thought things would get worse. Ohio as I understand it never has recovered from the last recession. Living in Cleveland Ohio, where Slavic village is the Epic center of foreclosure coupled with the self serving politicans is creating a financial nightmare.As a State and a people we are in desparate need of leadership that has principals, morals and the will to help its people.
At least with respect to Michigan, the map entitled “State Economic Conditions Worsen” is completely misleading. Not only does it graphically imply that the white states like Michigan don’t have worsening economic conditions, the caption at left states “NOTE:…white states have no projected gaps.”
Currently, Michigan’s projected budget deficit is almost a billion dollars, and since the state constitution mandates a balanced budget the fiscal situation confronting the Governor and state legislature is horrible. Whether or not Granholm and/or the legislature have made prudent financial policy decisions is a matter of intense debate, but the decline in tax revenue due to the slowing economy is a tremendous anchor for all decision-makers.
I’d be very surprised if a number of the other “white” states aren’t in similar circumstances. If the creator of the map is making the assumption that balanced-budget states don’t have projected gaps because gaps are constitutionally prohibited, that’s like me saying my financial condition is fine because my bank won’t let me bounce checks.
This state and local government budget problem is a major crisis awaiting. The water has receded far away from the beach and we are about 1-2 fiscal years away from an enormous nationwide problem at the local and state governments. The predictions I’ve seen floating around for 2010 fiscal year budget deficits are grossly underestimating the severity of this upcoming recession. These local and state governments will be going cap in hand to DC for major federal bailouts. This will be bad.
“This state and local government budget problem is a major crisis awaiting.”
Yep… makes you doubt the sanity of anyone wanting to be President. Masochism manifests itself in strange ways…
KJ Foehr,
It really depends on the banks and the politicians. I’d say Jeffco won’t make it through the summer, but I figured they’d already have filed by now.
But don’t be surprised if Jeffco doesn’t become a “too big to fail” situation like Bear Stearns. The county is undeniably insolvent and has already defaulted (twice) on its sewer bond obligations, but something is making the banks hold back. Whither the fed?
These are interesting times.
DonKei
Yes, they are no doubt too big to let fail, but that will probably be just the first, and the federal and state governments won’t be able to borrow enough to bail out all the local governments who will need help, AND help all the I-banks and other banks / financials who may “fail” in the coming months. Then what happens? I’m sure nobody knows how that will be resolved or what will happen if it is not!
Also, if Jeffco defaults, the equity market may sell off on the news; that is what I am wondering about right now.
KJ Foehr,
There’s not enough ink, paper and presses to print all the money that will be needed to save all these entities.
The markets are relatively sanguine right now. Don’t be fooled. We’ve only just experienced the first few squall lines of a cat-5 storm.
I expect the next squalls hit around autumn of this year, because I can’t imagine Jeffco lasting past that, and that sort of event will catalyze others.
Warren Buffett was on CNBC today, offering the view that we are currently in a recession being felt on Main Street.
http://www.cnbc.com/id/24350592
He doesn’t think this one will be “short and shallow”, either.
David I saw that segment too. Made me pause and wonder when WB stated the BS & Fed deal was a “game changer”.
What is the meaning of the word “recession” in this post? What does it mean for “individual states to have their own recessions?”
The evidence given is balance sheet deterioration, which is most certainly not the standard definition of recession.
This blog gets sloppier as it slides from financial to political commentary…
Great Post!, I enjoy reading it.
Thanks,
Edwin
http://www.EdwinHarahap.com