Skip to main content

What's the true state of state finances?

US states are in rather poor shape, financially speaking, and California's latest debt downgrade has shined a light on this topic once again.

This brings us to today's question: are California's fiscal problems indicative of a larger trend toward deteriorating state finances and budget shortfalls?

I'd like to start out by thanking Gregor Macdonald and the Stocktwits gang for discussing some of these issues in the last Sunday's MacroTwits hour on Stocktwits TV and for sharing some of the links I'll be posting for you here today.

For an opener on why state finances are important, let's get a quick overview from Business Insider:

"
Last week we mentioned how states are still grappling with monster budget gaps, and that they'll inevitably resort to slashing spending to remain solvent.

This, of course, will be a drag on GDP, and act counter to any pro-stimulus efforts Uncle Sam will maintain."


They go on to cite (as Gregor did) the recent Rockefeller Institute report, "Recession or No Recession, State Tax Revenues Remain Negative" (PDF), which finds that the trend in state and local taxes has been "clearly downward" from its previous mid-decade highs.

An introductory paragraph from that report:

"During the third quarter of 2009, total state tax collections as well as collections from two major sources — sales tax and personal income — all declined for the fourth consecutive quarter. Overall tax collections in the July-September quarter
fell by 10.9 percent from the same quarter of the previous year.

We have compiled historical data from the Census Bureau Web site going back to 1962. Both nominal and inflation adjusted figures indicate that the first three quarters of 2009 marked the
largest decline in state tax collections at least since 1963."

Meanwhile, Reuters reports positive growth in sales tax collections for a group of states mostly concentrated in the Midwest. Unfortunately, they note that the numbers could change quickly for these states, as they benefited from federal bailouts of the automotive industry which, in turn, boosted local manufacturing activity.

Lastly
, Mish has posted some comments and data on California and the states' finances that I found informative and would urge you all to check out. Here are some excerpted comments from Mish on state deficits and the large credit ratings agencies:

"In the United States, a fiscal crisis is hitting states like Arizona, Illinois, Kentucky, California, Virginia, and Illinois. California has a whopping 56% deficit as a percent of its General Fund Budget according to the
Center on Budget and Policy Priorities...

....There is little doubt California should be rated as junk already. Dick Larkin notes they give the states a lot of rope and wonders: "Frankly I can't understood why it took S&P so long."

...The big three rating agencies get paid on the quantity of debt they rate not the quality of their ratings. The higher they rate, the more business they get. For more on the problem as well as what to do about it, please see Time To Break Up The Credit Rating Cartel."

So there is a lot of material to look over here, but I hope this post will give you a pretty comprehensive start to any research you might want to do on this subject. I will continue to read through the Rockefeller Institute report and keep an ear open to your thoughts on "the true state of state finances". Have a great weekend, everybody.

Popular posts from this blog

How to "Pull the Trigger" on Your Trading Ideas

In our last post, I quoted hedge fund manager, Jim Leitner on the importance of following up on your investment ideas.  Today I'd like to follow up and share some thoughts on how you can learn to consistently "pull the trigger" on your best trading setups and investing ideas. In order to help you do that, we'll take from the best and offer up key insights from interviews with top traders and trading psychologists like Alan Farley, Brett Steenbarger, and Doug Hirschhorn .  Now before we get to their key insights on overcoming trading anxiety and pulling the trigger on your trading ideas, let's remember what Jim Leitner said in his interview: "Learn to love to listen to people and when you hear something interesting, follow up on it. Don't just think, "Well that's an interesting idea" only to find out a year later that the company you could've bought shares in is now up 500-fold. You never want to say woulda, coulda, shoulda...

Market Wizard, Steve Clark on Trading: Grow Your Equity Curve

Trading wisdom recap: Steve Clark , founder of Omni Partners, was featured in Jack Schwager's 2012 book, Hedge Fund Market Wizards .  Clark's interview with Schwager provided us with some valuable trading insights; "Lessons from Hedge Fund Market Wizards: Steve Clark" was one of our most popular posts ever. If I had to pick my favorite sections from Clark's chapter, it would be boiled down to these two concepts: "Do more of what works (and less of what doesn't work)" and "Manage your equity curve". Here's his full quote on the supreme importance of growing your equity curve :  "Your job as a trader is to make the line of your equity curve go from bottom left to top right. That's it. Don't get hung up on other supposed "mandates". Protect your capital and the direction of that equity line. "   I will leave you with one last series of quotes from Steve Clark's interview with Jack Schwager. ...

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4. ...