| 30 June 2010
State budget news was bad last year (from sunshinerevew.org):
States faced a budget shortfall of $113.2 billion in FY 2009. As substantial as that is, it is far less than the deficit some have forecast for FY 2010. According to one such projection, states could face a total shortfall of $142.6 billion this year
Federal “stimulus” funds, authorized under the American Recovery and Reinvestment Act, helped some states avoid some cuts in programs and civil service employment. However, as the entry below explains, that short-term fix carries costly consequences as well.
Illinois, whose projected deficit equals half its proposed $25.9 billion budget, plans to sell $496.7 million of debt backed by sales taxes today after two rating cuts and as consumers unexpectedly curbed buying in May.
Even with their top rating, the sales-tax-backed securities may suffer because they carry the name of Illinois. The state’s five-year general-obligation bonds pay investors 33 basis points more yield than California, the lowest-rated state, according to Bloomberg Fair Market Value Data, and the cost to insure Illinois debt is the most among municipal credits monitored by Bloomberg.
And getting much worse this year:
From the WSJ:
Investors are ignoring warning signs in the $2.8 trillion municipal-bond market, raising the risk of a reckoning, according to some market specialists.
Numerous municipalities are struggling financially. A Rhode Island city recently said it faces insolvency. Harrisburg, the capital of Pennsylvania, is considering a municipal-bankruptcy filing. And famed investor Warren Buffett recently warned of a "terrible problem" ahead for municipal bonds.
An excerpt from Bloomberg BusinessWeek”
Balanced-Budget Laws
Policy makers in a number of states are having trouble agreeing on further steps to resolve their financial problems. Action is necessary because every state except Vermont has some sort of balanced-budget law.
California, with a $1.8 trillion economy that’s bigger than Russia’s, faces a $19 billion deficit. Republican Governor Arnold Schwarzenegger wants deeper spending cuts, including elimination of the main welfare program for the poor, while Democratic lawmakers have backed tax increases.
New York, the third-most populous U.S. state, has been operating under weekly spending bills because lawmakers haven’t agreed on a comprehensive budget to close a projected $8.5 billion gap for the fiscal year that began April 1.
Illinois Rate Cut
Illinois, with a deficit equal to half its $25.9 billion budget, saw its debt rating cut after it failed to “enact significant recurring measures” to reduce the shortfall, Moody’s Investors Service said in a June 4 press release. The New York-based agency reduced the rating on $29 billion of general-obligation debt by one level to A1, putting Illinois on par with California as the lowest-rated U.S. state.
States “expect 2011 to be as bad as 2010,” said Raymond Scheppach, executive director of the governors’ association. They “will not begin the path to recovery until 2012.”
This deficit map shows how widespread the problem is:
The interactive version is here:
http://manyeyes.alphaworks.ibm.com/manyeyes/visualizations/state-budget-deficit-map-2010-esti
This is the closing graph from Pennlive.com on the Pennsylvania state budget problems:
The budget will determine if government workers will be laid off and could force school districts to raise taxes or cut programs. It also sets the stage for what Pileggi said will be even more painful decisions next year, when a multibillion-dollar deficit is projected and the federal stimulus aid will have ended.
This is the conclusion to a report from the SF Fed:
The current fiscal crises that most states are facing are generally the result of a severe macroeconomic downturn combined with a limited ability of the states to respond to such shocks. States are facing increased demand for public services at the same time revenue is falling. Federal stimulus support for state budgets is winding down over the next two years. Rainy-day funds are all but exhausted. Thus, state fiscal crises aren’t likely to go away soon and will probably get worse before they get better. The solutions states employ to close projected budget gaps will have painful effects on state residents and businesses but pose a more modest risk to the national recovery. Historically, the health of the national economy determines the health of state finances, not the other way around. Sustained improvement in the national economy is essential for states to grow their way out of their current problems and improve their fiscal conditions.
In 1966 the Dow Jones Industrial Average (DJIA) first approached 1000. 16 years later, the DJIA was still trading around 1000. Over that time period there were 13 market moves (up and down) of more than 20%. Our current economic predicament may create an analogous market. In such an environment, greed and fear will likely prompt many investors into making ill timed decisions. Absent a high risk, active trading strategy, Investors should deploy a balanced, well diversified portfolio to help navigate the bumps we will encounter in working through these budget and economic realities.
| < Prev | Next > |
|---|