Scary Future for Some States – Are they Too Big to Fail?

Some of our cities and states may be headed for bankruptcy and sentiment for bailing them out will be strong.  Some states may suffer from an excess of employers that fail, move elsewhere or downsize.  Nevada, Rhode Island, California, North Carolina, and Illinois had November 2012 unemployment rates of 10.8%, 10.4%, 9.8%, 9.1% and 8.7%, respectively.   Each state fared worse than the 7.7% national average.  High unemployment is a drag on the state’s economic growth and a burden on the state’s budget due to lower taxes and higher social safety net costs.  Some state leaders reversed bad fortune, but some just maintain their business-unfriendly stance, and repel job growth.   

A few states are so desperate that they try to build a new industry or operate a company themselves, but lack of experience and financial savvy can waste money and time.  For example, in 2007, Pontiac Michigan suffering from the slow demise of GM, acted on advice from some Hollywood veterans to build a state of the art movie studio and offer deep subsidies for production.  Pontiac committed its employee pension fund as backup for an $18 million loan, and a few movies were made after Michigan found yet another $40 million to help – but only 200 jobs were created.  At $290,000 per job created, far less costly schemes could have been thrown together.

Some states may have chronically underpaid into their pension and health care reserve obligations.  Barclay Capital’s study of major pension funds found that Illinois public employee pensions were likely headed for insolvency in at some time the 2020s.  The pensions were 30-40% funded and while contributions were being made, they assumed the fund could earn a very optimistic 6-8% per year.

When an increasing portion of the state population pays extremely low income taxes at the same time as a declining portion pay high taxes, the state has created disincentive for the high wage earners to stay, and a looming budget problem, especially if low earners are social safety net dependent.  It’s not about name-calling, it’s about state budgets in the danger zone.  Florida has a relatively high population of seniors, but wisely relies on taxes other than personal income tax.  Unfortunately, California, Illinois, and Michigan face the unfavorable taxpayer-mix problem.  

A slow-moving economic recovery stated in 2009, and not all states are returning to economic vigor at the same pace.  When residents of those states tire of being left behind, they may seek a federal bailout.  In many cases, years or decades of economically-unfavorable state policy should be repaired first.

Alan Daley is a retired businessman living in Florida and following public policy from the consumer’s perspective.

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