States of Decline

I camce across three interesting factoids on state goverment finances over the last week. Of course, they all come from big liberal tax and spend states. In my view, we are going to increasingly see the neglect of traditional state and local services like education, public safety and highways in a numbe of states under the crush of welfare state spending. 

Will the voters in these states wake up? Or have these states all reached the tipping point where there are just more takers than makers?

For voters in other states, look at what is happening in Massachusetts, Illinois and California and learn from them.  It doesn't have to be this way.  


Massachusetts

The Wall Street Journal reports that Massachusetts expects to spend 54% of its state budget on health care in 2012!  What about education, roads and public safety? They are being squeezed and they will continue to be squeezed. Remember, this is the state that covers more of the uninsured than any other state. Covering more people and limiting uncompensated care was supposed to limit costs. Health care costs in Massachusetts are the highest in the United States-27% higher than the national average.

Health costs—Medicaid, RomneyCare's subsidies, public-employee compensation—will consume some 54% of the state budget in 2012, up from about 24% in 2001. Over the same period state health spending in real terms has jumped by 59%, while education has fallen 15%, police and firemen by 11% and roads and bridges by 23%.

Expect this trend to continue.  The appetite for health and welfare spending is close to insatiable.  Many more states will start to look like this and Obamacare will accelerate the trend.
Illinois

Fox Business News reports that Illinois is on track to spend more on state pensions than it will on education by 2016. Its five public pension funds are underfunded by $83 billion! Illinois already increased its personal flat income tax rate by 67% (from 3% to 5%) across the board last year. They also already have the third highest state corporate tax rate in the country at 9.5%.

Illinois faces severe underfunding in its pension system. It reported a funded ratio of 43.4%, way below the 80% considered healthy. Based on fiscal 2010 data, Illinois had the lowest funded ratio of any state, according to a June 2012 report by the Pew Center on the States.

There is not a better example of mortgaging the future of the next generation for the sins of the past than this.  Unless public sector pensions are brought under control more states will also look like this in the future.

California

California is facing a $16 billion budget deficit.

On November 16, 2011, the Office of Legislative Analyst released a report forecasting a budget deficit of $3 billion at the end of 2011-12 and an operating shortfall of $9.8 billion by 2012-13.Today, California's actual budget deficit is now a $16 billion headache (up from $9 billion in January).

Instead of tackling debt, California lawmakers approved a $68 billion project to build a high-speed train connecting Los Angeles and San Francisco. (A flight from L.A. to S.F. takes about one hour and costs around $100 one way vs. a 10 hour drive.) Interestingly, the approval allowed the state to collect $3.2 billion in federal funding that would've otherwise been rescinded. The federal government rewarded California for needless spending projects, leaving U.S. taxpayers on the hook.

California was counting on profits from the sale of Facebook stock to fill as much as $2 billion of their budget hole. That does not look like a good assumption right now.

California is also looking to generate another $7-$9 billion if Proposition 30 is approved by voters in November which would raise the state sales tax from 7.25% to 7.5% and raise the top personal income tax rate to 12.3%.

Of course, against this backdrop is the fact that three California cities-Mammoth Lakes, Stockton and San Bernardino-have filed for bankruptcy protection since June.

California has shown that you can have every natural advantage as a state (climate, talented people, natural resources,etc) and you can run it into the ground with poor public policy decisons.  I do not see how they can avoid a financial catastrophe over the next few years.  This is our Greece.

I have written before that one significant issue that will not be on the ballot in November is whether the federal government will bail out California and Illinois when the inevitable occurs on the Left Coast.

We have seen Wall Street bailouts. We have seen European bailouts. We are sure to hear calls for a California and Illinois bailout (I think Massachusetts will survive). This may be the most significant unspoken issue that will be before us in the next four years. You will not hear about it in the Presidential race.  However, who is sitting in The White House and in Congress will make an enormous difference when the time comes. Are you ready to send your hard earned tax dollars to these states of decline? Vote with that in mind in November.