Wednesday, July 6, 2011

Meredith Whitney, Wall Street Journal Opinion, May 18, 2011, on state budgets

"[June, 2011] will be pivotal for most states,
as it marks the fiscal year end and is when balanced budgets are due.

The states have racked up over $1.8 trillion in taxpayer-supported obligations
in large part by underfunding their pension and other post-employment benefits.

Yet over the past three years,
there still has been a cumulative excess of $400 billion in state budget shortfalls.

…[June, 2011] will also mark the end of the American Recovery and Reinvestment Act's
$480 billion in federal stimulus, which has subsidized states through the economic downturn.

States have grown more dependent on federal subsidies, relying on them for almost 30% of their budgets.

The condition of state finances threatens the economic recovery.

States employ over 19 million Americans, or 15% of the U.S. work force,
and state spending accounts for 12% of U.S. gross domestic product.

…while state revenues have improved, they have done so in part from tax hikes.

Expenses are near the highest they have ever been due to built-in annual cost escalators
that have no correlation to revenue growth (or decline, as has been the case recently).

Even as states have made deep cuts in some social programs, their fixed expenses of debt service
and the actuarially recommended minimum pension and other retirement payments have skyrocketed.

While over the past 10 years state and local government spending has grown by 65%,
tax receipts have grown only by 32%.

…off balance sheet debt totals over $1.3 trillion, as measured by current accounting standards,
and it accounts for almost 75% of taxpayer-supported state debt obligations.

Only recently have states been under pressure to disclose more information about these liabilities,
because it is clear that their debt burdens are grossly understated.

…some of my colleagues focused exclusively on finding the most up-to-date information
on ballooning tax-supported state obligations.

This meant going to each state and local government's website for current data,
which we found was truly opaque and without uniform standards.

What concerned us the most was the fact that fixed debt-service costs
are increasingly crowding out state monies for essential services.

For example, New Jersey's ratio of total tax-supported state obligations to gross state product is over 30%, and the fixed costs to service those obligations eat up 16% of the total budget.

Even these numbers are skewed, because they represent only the bare minimum paid
into funding pension and retirement plans.

We calculate that if New Jersey were to pay the actuarially recommended contribution,
fixed costs would absorb 37% of the budget.

New Jersey is not alone.

The real issue here is the enormous over-leveraging of taxpayer-supported obligations
at a time when taxpayers are already paying more and receiving less.

…Corporations are relocating, or at a minimum moving large portions of their businesses
to more tax-friendly states.

Over time, individuals will migrate to more tax-friendly states as well,
and job seekers will follow corporations.

…state and local government employees are having to renegotiate labor contracts
that they once believed were sacrosanct.

…These are just the facts. The sooner we accept them, the sooner we can get state finances back on track,
and a real U.S. economic recovery underway."

Meredith Whitney
Wall Street Journal Opinion, May 18, 2011

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