Posts Tagged ‘states’

The Illinois Comptroller’s April report  is scary reading.  The state is $4.5 billion in arrears on payments to vendors and others (like school districts and service providers) with no end in sight.  The Comptroller expects 2011 to be worse.  The following chart from the report looks to me like a deteriorating structural imbalance moving towards a delicate liquidity position.   

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As long as markets are willing to provide liquidity, the state will be able to continue on this trajectory.  As we learned from the New York City fiscal crisis in the mid 1970’s, not to mention the banking liquidity issues beginning August 2007 and later, those institutions that depend on short term market access for viability will freeze up (seize up?) when the markets don’t cooperate.  

The Civic Federation prepared a detailed analysis  and critique of the proposed 2011 budget.  In the report they graphically present the state’s roll-over of short term debt from 2009 to 2010.   In 2011 the state expects to issue $4.7 billion notes for “voucher payments.”  Where will the re-payments come from?  

So here’s some simple math.  The state’s debt service payments for 2011 jump from $1.6 billion to $2.8 billion.  Short term debt will be $4.7 billion.  The budget assumes $27.4 billion General Fund revenues in 2011, so it looks to me like debt service consumes a hefty 27.4% of that total.  Red flag.  Maybe there will be some roll-overs, some additional budget cuts, maybe some tax increases, maybe the economy will be good to the state and they will make it into 2012.  But the long-term problem here is huge.  

 Bondholders are feeling sanguine since, like California, payments go to debt service before other services.  As tax increases loom on the horizon, investors want that tax exempt paper.  As the Civic Federation described:  

As the State continues to issue more G.O. debt than it retires on an annual basis, the amount of General Funds committed to debt service payments will continue to rise. To make these payments the State pledges its full faith and credit to its bondholders and legally commits itself to transfer the debt service payment into the General Obligation Bond Retirement and Interest Fund (GOBRI) prior to paying any other bills or transferring funds for any other appropriations.

  

  

 

  
 
 

 

I’m putting on my public policy hat now (as opposed to financial analyst).  There’s no mechanism for bankruptcy or receivership at the state level in the U.S. which may be comforting from an investor’s perspective, but lousy public policy.   There’s no IMF and no process at the federal level to re-structure state finances other than handing out bailout grants or loans — which usually require increased borrowing or matching spending.   There’s no Board of Directors as in the private sector whose charge is to protect shareholders (substitute “taxpayers” for shareholders) even when painful actions are necessary.   So we are left with random taxpayer uprisings and the occasional vote for elected officials and the analysis of think tanks.  Maybe there will be a lawsuit by vendors or school districts to get the state to meet its obligations.  Maybe vendors and residents will vote with their feet.   The preferred approach would be an objective mechanism with authority and mettle to resolve the fiscal mess.   Someone please tell me that I am wrong …

As this article from the Tax Foundation states, you can’t make this stuff up…

We have two opposing camps in the muni-market at the moment: those who say it is the next systemic shoe to drop and the rating agencies that are systemically raising ratings.

Which is right?

We have moved from a market that has had heavy intermediation from the bond insurance companies to one where investors are on their own. Bond insurers historically performed heavy analysis and monitoring of the credits they insure and actively affect the legal protections embedded in a security. Bank credit enhancers have done the same, although in some cases their agreements allow them out of the risk under certain circumstances. Rating agencies assign their rating on sale and their business model has never been designed to provide robust monitoring of issuers in the secondary market. The Moodys and other agency default studies covered this time period – a relatively prosperous period from 1970 – 2007 when pending defaults on the investment grade level were mostly managed by bond insurers. Further, the default studies did not include insured bonds.

Municipal bonds do default and have throughout this period –not at all in large numbers by any comparison to the corporate world. Knowledgeable high yield investors are aware the risks in hospital, senior care, land development, and corporate-style tax exempts such as industrial revenue bonds. Project finance, such as the Harrisburg incinerator, Las Vegas monorail and Connector 2000 also carry high risk. (I should add WPPSS and other nuclear power projects to this list.)  These should not be lumped together with the other 30,000 or so municipal bond issuers. Like the stock market, there are many, many nuances among borrowers. Only now the investor is left to grapple with his own resources – and the loss of granularity among this diverse and deep market from ratings “re-calibration”.

(Concerning re-calibration of ratings:  As I have said before, lowering corporate ratings to their appropriate probability of default relative to municipals – would achieve the same effect, and be truer to their own research. Instead, the agencies are compressing ratings into fewer categories and eliminating much granularity for investors. But of course the other approach would have been business suicide and harmed many corporate portfolios.)

Within this, market prophets are now generalizing greatly, mostly those who have not spent their careers in this non-standard, messy, sometimes corrupt and poorly understood state and local financial world.

This brings me to some comments on Rick Bookstaber’s recent post. Many of his points are strong and need to be actively debated, but others generalize to the detriment of this very varied marketplace.

Leverage and Opacity. Leverage in the municipal market comes from making future obligations to employees in order to pay them less now. This is borrowing in the form of high pension benefits and post-retirement health care, but borrowing nonetheless. Put another way, in taking lower pay today, the employees have lent money to the municipality, with that money to be repaid via their retirement benefits. The opaqueness comes from the methods of reporting. For example, municipalities are not held to the same standards as corporations in their disclosure.

Agreed. The Tower Amendment should be abolished and municipalities that want to participate in public capital markets and be rated like corporates should be held to the same reporting standard. Period. Would you buy a corporate bond whose disclosure was two years old?

The argument that it’s too expensive and too burdensome for smaller municipalities to achieve transparency can and must be resolved. Technology and know-how exist to achieve this in a cost effective manner. Those municipalities that cannot produce timely and accurate reporting – should borrow locally and not expect to participate in national markets. Or they should not be given (potentially misleading) ratings. Borrowing locally will likely end up costing more than paying the auditor to get the report done in a timely manner.  Hiding behind the “municipals don’t default, so what difference does it make?” argument is so yesterday.

The rating agencies still do not fully incorporate pension and other benefits into the debt statement that produces their debt ratios and medians. Taxpayers certainly do consider these factors. All obligations that are paid from the public purse should be clearly disclosed. Understandably, rating agencies argue that they serve investors not taxpayers. But political risk – unwillingness to pay – clearly reaches back into the investor’s pocket.

Size and potential systemic effects. That this is a big market in the credit space goes without saying.

This is a big market, but is not uniformly systemic like housing.

Diversification. Geographic diversification would give a lot more comfort for municipals if it hadn’t just failed for the housing market. Think of why housing breached the regional barriers. It was because similar methods of leveraging were being employed through the country. So the question to ask is: Are there common sorts of strategies being applied in municipalities across the nation?

In some cases. Given our federal system, each state has its own set of rules for local municipal finance. For example financing infrastructure for housing and economic development is vastly different in structure and credit quality in California (Mello Roos for example) vs. Florida (community development districts) vs. Texas (municipal utility districts).

Bookstaber’s point does apply to the municipal market in several ways. Investment portfolios and cash management are prey to marketers of the security “du jour”. As one of his commenters suggests, Fannies and Freddies could put municipal investments systemically at risk of a federal policy change — affecting many municipal government investors at one time. I would add to this list: securities lending practices among pension plans and other large public funds  (which some practice but others do not).

Ratings triggers on counterparties that create terminations, unwinds and a change in interest rates, basically legal provisions that automatically change the terms of the deal — also create across the board risk for those borrowers involved. Examples include variable rate securities, swap transactions, LOCs and GICs. These structures effectively embed corporate and market risk into municipal credit.

At the traditional fixed income municipal debt level however, there is significant diversification among security types and legal structures – given the 10th amendment and individual state peculiarities.

Gross versus net exposure. The leverage for municipals is not easy to see. It might appear to be lower than it really is because many, including rating agencies, look at the unfunded portion of these liabilities. They ignore the fact that these promised payments are covered using risky portfolios. And not just risky — the portfolio might apply hefty (a.k.a. unrealistic) actuarial assumptions of asset growth.

Agreed. Analysts and investors should incorporate a haircut for unfunded pension and benefit liabilities that use overly ambitious earnings as a discount rate. The debate about “risk free” vs. a historical earnings rates is an important one. Stated another way, this debate points to the fact that public pensions (defined benefit) are irrevocable, guaranteed and must be paid.  How would you invest funds when you could not afford to lose a penny vs. money you are willing to take on more risk? Since pension obligations are long-lived, the counter-argument that earnings over time should be used has some merit as well.   But the inequities between public retirees and the rest have piqued the taxpayer whose 401K and life savings have been subject to market losses.  Also, the “defined benefit” retirees are facing off against the “defined contribution” beneficiaries.  Fairness is an important public good, as difficult as this debate may be.   

Rating agencies. In terms of the work of the rating agencies, here are two questions to ask. First, list the last time they did an on-site exam of the municipalities they are rating. Second, are they looking at the potential mismatch between assets and liabilities, or simply at the net – the underfunded portion of the portfolio.

Absolutely. Maybe they don’t have to do a site visit on each review, but they should disclose the date of their latest full review for each rating, no question. How many of the re-calibrated ratings have been freshly reviewed?

Defaults. Municipalities are not quite as numerous as homeowners, but there certainly are a lot of them. And they have the same issues as homeowners. Granted, they will not pour cement down the toilet before walking away. But they have a potentially equally irrational group – the local taxpayers – to deal with.

Disagree. See my comments above and other blog posts on this site. Municipalities do not behave the same as homeowners. Clearly there are scoundrels and irresponsible politicians who just want out of obligations they did not understand or were misled from the get-go.

Even with debt repudiation talk in the air, it is difficult to file bankruptcy in most states, and default is not a good option for a municipality that needs capital markets access. Plus, as covered elsewhere, given the 10th amendment, bankruptcy does not give the federal courts the same kinds of control over a municipality as a corporate entity.

Keep in mind that the majority of municipal borrowers (like the majority of homeowners) want to do the right thing.

Neither are taxpayers irrational. Protests are explainable. There are only certain states where initiatives and referenda are permissible (and this too has historical roots). There are correlations between rapid growth in taxable assets, public spending increases and taxpayer protest. (I have written about this on my blog and elsewhere.) 

Taxpayers are right to be angry at politicians who are spending their money mainly to buy votes and for poor policy reasons. We need to look at the spending patterns in government and have this debate. How many say, “It’s a pre-election year, of course nothing will get done.” In the private sector, someone with that approach would be fired.

Two important worries Bookstaber hasn’t addressed directly:

Liquidity: There are major liquidity issues at some of the states, quickly filtering down to the local level. At least three states have held back making payments to localities and vendors – California, New York and New Jersey. At some point liquidity markets may stop lending – or the cost will become prohibitive — which will have immediate impact on the economy in those states. Where enough taxes roll in the next month to cover payments, these states will limp along until they are able to cure their structural imbalance or they will hit the wall. While some look for a federal bailout in this situation, a failure to tackle the cure for structural deficits is bad policy. As we learned in recent banking crisis, institutions that require regular market funding for survival will fail in a liquidity freeze.

State solvency: tied to the first point, there is no mechanism in our society to address state insolvency. States, as sovereign entities, do not go bankrupt. There simply does not exist any legal or political institution with the authority to facilitate an orderly reorganization of state obligations. We need to think up objective, non-political structures that put the brakes on spending increases when times are good and that facilitate reorganization when times are bad.

The tables below are for contextual reference as state and local governments face draconian spending cuts.   The combination of public policy with the several bubble periods over the last twenty-five years has created a toxic brew.  Some state and local governments are valiantly trying to tackle the issues while other legislatures and councils are more interested in fist pounding.  For those involved in financial analysis (as well as taxpayers) a careful eye is called for. 

State and local spending grew dramatically during the post-Reagan years of the “Program for American Recovery”.  A historic devolution of responsibilities from the federal government to state and local government was coupled with overall economic growth during this period.  I have commented on this issue in prior posts and the presentation I gave at the recent analysts’ conference.  The following tables are expanded to include the 1982-1992 decade.  The first set of columns show dollar increases in 1982 constant dollars.  To account for population changes from migration, which naturally cause increased spending for schools, infrastructure, healthcare, etc. the second set of columns shows the constant dollar increase in per capita spending.   Embedded in these figures are a complex set of decisions on spending, and different approaches to governance, not to mention divergent demographic and economic profiles across the states. 

click image for independent table

click image for independent table

click table for independent image

click table for independent image

 

Florida and Nevada top the list in the 1982-1992 decade with spending increases of 105% and 108% respectively.  Florida’s population grew by nearly one-third during this time while Nevada grew by more than 50%.  Per capita spending in Florida increased nearly 58% while Nevada increased 36%. 

On October 19, 1987, Black Monday, the stock market crashed,  followed by the savings and loan crisis and the Gulf War which combined to hit state and local budgets hard.  Mid-term elections during the Clinton administration resulted in Republican control of Congress and the “Contract with America” which further devolved responsibilities to state and local governments.  Some governments slowed their spending increases in the 1992-2000 period.  On a per capita (constant 1982 dollar) basis spending actually declined in some places.  (Note that these are combined state and local figures from the Census Bureau — most other sources, such as Pew, Rockefeller and Center for Budget Policy Priorities focus only on the states.) 

Population growth figures allow some analysis of the changes.  For example, Nevada had nearly 50% population growth which helps to explain a 7% decline in per capita spending during the 1992-2000 period.  New Jersey, in contrast, hard hit by the recession, had only a 7% increase in population but had a nearly 2% decline in per capita spending over the period.

(For the detail oriented reader, there is a minor change in the numbers since I adjusted for 2007 population — the prior tables used 2008 population. Data source: Census Bureau and Bureau of Labor Statistics.  Note that spending includes current year payments for retirement and health benefits but not capital outlay.)

Several states are showing scary illiquidity.  New Jersey’s governor just yesterday impounded funds the legislature had already appropriated and announced a state of emergency.  He stopped short of “declaring” emergency, which would have given him special powers over contracts.  New Jersey comes up high on the list of states with big budget gaps, heavy pension obligations and loudly falling revenues.  New Jersey spending has grown dramatically over the last 25 years.  While there was one state employee for every 86 people in 1982 in the state, today there is one employee for every 60 people.  In the 2000-2008 time period, spending grew 28% on a constant dollar basis.  Debt as a percent of gross state product (adjusted for real 1982 dollars; bear with me) was 11.1 percent in 2008 — among the top ten states, but no where near the US figure of around 60%.  This is not to mention any unfunded pension liabilities plus $1.2 billion borrowing from the US Treasury to make unemployment insurance payments.

Illinois is in the same deep water.  One month ago the state had $5.1 billion in unpaid bills and is delaying payments to vendors by than 90 days.  Crain’s Chicago Business shows columnist Greg Hinz saying its unclear when full insolvency takes place — it just gets slower and slower until business moves out and payroll isn’t met.  

Lets roll back the clock.  The Reagan administration in the early 1980’s proposed the “Program for an Economic Recovery” which devolved programs from the federal to the state and local level.  The action coincided with the end of the 1982-83 recession when the economy took of sharply leaving surplus in many states’ coffers.  For seven straight years state governments increased their budgets 8% each year or 3.2% in constant dollars.   The recession in the early 1990’s left the states poorly positioned to handle the downturn.  Like today, there were mid-year budget reductions, cuts in aid to local government and increases in taxes.  New Hampshire, Rhode Island, Massachusetts, California and Illinois saw ratings downgrades during that time.  Record tax increases led to voter unrest and new tax limitations.  In the mid-term elections, Bill Clinton lost the House of Representatives to a Republican majority.  Newt Gingrich and his party’s “Contract With America” promised 10 bills in 100 days — to further devolve social programs to the states.  Fast forward to the high tech boom in the late 1990’s and bust, then 9/11.  There was monetary easing and policies designed to advance homeownership and voila, here we are today.  I’ve linked two charts that show state spending increases in constant dollars sorted from high to low state expenditure table1992-2000 and state expenditure table2000-2008.  California, for example, held the line during the “Contract with America” years, but expanded 29% between 2000-2009.  Rhode Island also held the line during the first period but grew 30% from 2000-2008.  Illinois grew its budget in constant dollars in both periods — 22% from 1992-2000 and another 20% from 2000-2008.

Also attached is a power point of a talk I gave this week on these topics at the National Federation of Municipal Analysts advanced seminar in Florida.

Oregon voters passed Propositions 66 and 67 yesterday which support Governor Kulongowski’s budget proposal.  The following link will give you detail on the propositions, the vote, the key donors to each campaign and the groups advocating pro and con.  Oregon is a high income tax state and ranks high among the states with large budget deficits and high unemployment.  (See state’s post, and stress rankings chart)  This is from Ballotpedia:

On July 20, 2009 Gov. Ted Kulongoski signed two tax bills that will increase taxes in the state by $733 million through increasing the state’s corporate minimum tax, raising taxes on the state’s high-income individuals and raising income taxes on businesses.[1] In reaction to the news, several Oregon citizen and business groups geared up to use the veto referendum process in the state to try to stop the hikes.[2][3]

On October 8, 2009, the Oregon Secretary of State’s office announced that both ballot measures had qualified for the ballot. According to Don Hamilton, spokesman for the Secretary of State’s office, supporters of the measures turned in substantially more than the 55,000 signatures needed to qualify each measure for the ballot. According to Hamilton: “They filed more than twice as many [signatures]. It’s unusually high for a statewide ballot measure.”[4]

Midterm congressional elections will be lively this year.   Conditions are ripe for tax and spending initiatives and numerous recall elections are also on the popular agenda.  Budget deficits, rising taxation and runaway spending are factors leading to tax and spending limitations.  Anger at the federal government sometimes gets played out at the state and local level where people can air their views in the local media and have greater influence on budgets, tax levies and spending. 

The combination of denied credit, deeper debt, harsh taxation…led the discontented to suspect a conspiracy by the moneyed interests of the country to enslave them in a web of economic servitude.

(From David Schmidt, on the rise of the initiative and referendum movement in the 1880’s. Citizen Lawmakers: The Ballot Initiative Revolution, Temple University Press, 1991)

The same characteristics that showed up in the 1970’s and today were present in the original initiative movement.  Indebted farmers and frontiersmen who had moved out west felt that they were subject to the special interests of industrialist bankers, railroad barons and land speculators.  The boom and bust cycles of westward development left a rift between the farmers and frontiersmen and the groups that they saw as the exploiters.  It was the farmer’s belief that these greedy influences had corrupted the legislatures and that they were being taxed to help those special interests. 

In the late 1880’s the number of farm foreclosures exploded and a vast number of farms were taken over by the loan companies.  Out of this era came the Farmer’s Alliance which later developed into the Populist Party.    The right of citizens to directly create laws through the initiative movement – “direct democracy” — stems back to this time and later with the Progressive Party.  These groups were strongest in Texas, the Dakotas, Kansas, Oklahoma, Alabama, California, Colorado and elsewhere in the South and West.  Ballotpedia, a “wiki”, or open electronic encyclopedia, (like “wikipedia”) shows the following map of states that permit initiatives, referenda and constitutional amendment.

Click twice to enlarge

Click twice to enlarge

In the 1970’s rapidly rising real estate values accompanied by a tax structure that captured an increasing proportion of homeowner’s income in property taxes again led to significant voter unrest.  That time period gave us California’s Proposition 13 in 1978, passed by two-thirds of the state’s voters and reducing property taxes 57%.  In the 1960’s and 1970’s California had experienced an extraordinary growth in property values and in tax bills, largely due to inflation and dramatic increases in population.  In Massachusetts, prior to passage of Proposition 2 ½, state and local taxes grew from 103% of the national average to 124% of the national average.  Idaho, which passed Petition No 1 in 1978, had seen residential taxes nearly double between 1969 and 1978.  Later, Colorado voters passed the “taxpayer bill of rights” or TABOR which sought to significantly limit government (1992).  (TABOR has subsequently been loosened but a movement is afoot to roll back the liberalization of the original law.)

The presence of a committed and zealous individual or group is another key ingredient.  Although some dismiss these individuals or groups as “cranks”, they will persist in introducing ballot measures year after year, until something passes.  Howard Jarvis in California and Bill Sizemore in Oregon are two well-known names.  Today’s Tea Party groups are spawning new leaders in this effort. 

Demographics play a part in initiative and referenda movements as well – states with lots of retirees like Florida, Arizona and California – have ready workers with time on their hands to get petitions signed and talk with the neighbors.  In addition, the continuous migration of people from place to place has intensified demographic differences. 

The “pick-up-and-go” mindset in the U.S. has led people to sort themselves into like-minded communities – reinforcing particular political viewpoints.  “Over the past thirty years, the United States has been sorting itself, sifting at the most microscopic levels of society, as people have packed children, CDs, and the family hound and moved…When they look for a place to live, they run through a checklist of amenities: Is there the right kind of church nearby? The right kind of coffee shop? …When people move, they also make choices about who their neighbors will be and who will share their new lives. Those are now political decisions, and they are having a profound effect on the nation’s public life…In 1976, less than a quarter of Americans lived in places where the presidential election was a landslide.  By 2004, nearly half of all voters lived in landslide counties.”  (Bill Bishop, The Big Sort, Houghton Mifflin, 2008)  Another of Bishop’s key points is that interacting primarily with like-minded people tends to make a group’s political viewpoint and perspective more extreme.  Electronic social media also plays this role.  The use of the Internet, blogs, Twitter and YouTube for grass roots campaigns has made it easier to create, inform and activate like-minded communities.

The sorting, polarizing and intensifying of political views has created gridlock in many state and the federal legislatures. Maintaining the primacy of one’s political party and political viewpoints often win out over collaborating to create effective policy. “California’s primary system and gerrymandered Assembly and Senate districts, both parts of the Constitution, consistently produce candidates from the ideological extremes.  In such an atmosphere, party orthodoxy rules all, and crossing the line to compromise is political suicide.  For this reason, real, desperately needed change is blocked at every turn, and only bills like regulating tanning booths actually escape alive.”  This is from Jim Wunderman in the San Francisco Chronicle last summer.     Examples are easy to find in the state legislatures, notably California and the embarrassing New York State Legislature where Democrats physically locked out the Republicans last summer.  At the Federal level too, Republicans’ refusal to vote on any proposals from the Democrats or collaborate on sensible solutions is a further example of this polarization.

Finally, funding for initiatives and referenda has become big business for some proponents.  In California and elsewhere, gathering petitions and paying for advertising campaigns has spawned a well-funded cottage industry.  The recent Supreme Court decision permitting corporations and unions unrestricted campaign funding will inevitably reinforce the trend. 

Grassroots groups are reacting.  The Tea Party is an example of the tension between the grassroots and organized parties.  The Tea Party is a loose and in some areas unaffiliated collection of organizations.  Tea Party Nation, Tea Party Express and Tea Party Patriots are among the few national organizations.  Tea Party Patriots has accused Tea Party Nation of co-opting the name from the grassroots movement and receiving support from the GOP.  Teapartynation.org is sponsoring the first national convention on February 4-6 in Nashville, Tennessee and Sarah Palin is the featured speaker.  Complaints about the hefty registration and GOP support are common.  A lawsuit erupted in Florida over the registration of the name as a political party.  The defendants argue that the name stands for “taxed enough already”.  The blog site “TPM Muckraker” has some interesting coverage of these various party disputes.

Whatever your affiliation, ballot initiatives will likely affect state and local government finance as well as governance in the next year.  It is worth following these trends.  Along with Ballotpedia, we recommend the Initiative and Referenda Institute at the University of Southern California as a good resource, as well as the National Conference of State Legislatures.

The slowdown in migration in the U.S. has significant consequences for municipal finance.  New population growth in a community has been the driving force in municipal infrastructure finance since the beginning – and the slowdown we have seen over the last two years will affect bond volume in previously high growth centers.  Borrowing to meet the needs of growth is politically easier when expectations for repayment fall on the new beneficiaries.  Borrowing for maintenance is more challenging and we expect capital spending to fall in the near term both from internally and externally generated funds.  In addition, problems from high foreclosures and developer bankruptcies have cropped up on the suburban frontier, where the slowdown in migration is pronounced.  A look at the recent census report adds an important dimension to our understanding of state and local fiscal condition.

Local movers – people who move from city to suburb and suburb to suburb are typically first time homebuyers, mover-uppers and those whose family circumstances have changed (births, deaths, and divorce).  The stimulating tax credit for first-time homebuyers plus reduced downpayment requirements (which combined to allow zero downpayment for many) has offset some of the downturn in the housing industry over the last six months – first the threat of tax credit expiration pushed some into the market and then the extension brought in some additional buyers. 

People move long distance mainly for jobs.  With many economists predicting a slow recovery for employment, long distance moves are unlikely to pick up near term.  “Long-distance migration acts as an engine of growth in many metropolitan areas…younger adults are far more likely to move than older individuals,” according to William Frey of the Brookings Institution.  (There is a small peak in migration among people in their early sixties who move for retirement.) Long distance movers tend to be college educated and professional. 

Florida:  Frey peeled back the demographics on Florida’s net out-migration, a historic trend and a surprise to many.  “The shift from net in-migration to net out-migration in Florida was especially strong for whites, Hispanics, younger people, married couples and persons with some college education…Despite its total net out-migration, Florida still attracted people ages 55 and over in 2007-2008.”  Sales taxes and health care services may perform satisfactorily under this demographic shift to older residents.  But older migrants on fixed incomes will reinforce anti-property tax sentiment in the state and there will be even less interest in supporting stressed school finances.

California: More people are staying put.  The state is the mirror image to Florida – a reflection of softening real estate costs and the weak job market in magnet states such as Arizona, Nevada and Oregon. 

Arizona and Nevada: These states’ dependence on construction will hurt in the current environment.  Arizona’s net in-migration, while still positive, has fallen by more than 54% from its peak in 2006 to 2008.  Nevada’s net in-migration has fallen more than 75% from its peak in 2006 to 2008.  At the peak of Nevada’s building boom in April, 2006, more than 11% of all employment in the state was in construction.  Arizona’s construction employment was next highest at 9.3% followed by Florida at 8.6%.  This compares with a U.S. level of 5.6%.  Managing through this drop-off is critical.  The negative comment in Moody’s downgrade report on Arizona’s upcoming COP sale caught our attention: “lack of institutionalized best financial management practices”. 

Trouble in suburbia: The outer suburbs are suffering the fall in migration with increased crime and squatters in empty houses.  Some writers, such as Christopher Leinberger declare that exurban communities will become the next slums.  ABC Australia covered this phenomenon last spring: “…it is easy to find signs that America’s relentless suburban expansion may have petered out…Streets remain incompletely paved and poorly lit, the legacy of a builder that declared bankruptcy.  And transient renters have replaced homeowners who were forced out by the foreclosure crisis.”  Prince William County, where the subject community is located saw a nearly 40% drop in property values according to the county’s 2010 budget message.  The “Aa1” rated county is entering the year well-positioned for the challenge, but has cut the budget across the board, eliminated services and increased classroom sizes.  The county has taken down its capital improvement budget by 64% since last year.  Other governments that are less well managed may not fare as well. 

Cities and dense metro areas well-positioned for economic recovery: “Migration matters,” according to the Economist December 19 edition.  “Economic growth depends on productivity and the most productive people are often the most mobile…When clever people cluster they can bounce ideas off each other.  This is why rents are so high in Manhattan.  Robert Lucas, a Nobel economics laureate, argues that the clustering of talent is the primary driver of economic growth.”

I have placed a longer discussion of these issues for download when you click Migration Report.

State legislatures, required to balance their budgets, are up against the wall.  Budget gaps have worsened mid-year.  When you total the gaps going into the budget for FY2010 with mid-year fissures you come up with more than $190 billion according to a recent report from the Center for Budget and Policy Priorities. This is after the benefit of the federal stimulus monies.  (Note that many states have either raised taxes or cut the budget to address the pre-budget gaps – CBPP has several studies on these actions.  The National Conference of State Legislatures also chronicles the current status of budget gaps.)  Another think tank, the Rockefeller Institute, looked at the revenue side of the gap and how states are coping with the current recession.  State revenues, compared with local government, are more volatile, reacting faster and deeper in the current recession.  Sales and income taxes are most volatile.  Also volatile, but a smaller percent of the budget are capital gains taxes and the all-but-gone mortgage recording taxes.  With most economists predicting a jobless recovery, income taxes and sales taxes are likely to remain depressed for some time.

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