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Why Many States are on the Brink of Insolvency

by Brett on June 21, 2010

Wondering why state governments, after decades of increased spending, are just now “all broke at once?”  This chart, courtesy of The Globe and Mail, says it all:

Change in State Tax Revenue

Source: The Globe and Mail & US Census Bureau

The bottom line is that until tax revenue growth climbs again, the states are going to be hard pressed to stay solvent.  They can’t cut expenses fast enough to keep up with falling revenues.

And ironically (perhaps poetically so?) – the crappier the economy is, the greater the strain on the social safety nets that state governments provide.  So they get slammed from both sides.

It hearkens back to Maggie Thatcher’s famous quote: “The problem with socialism is that you eventually run out of other people’s money.” It appears that this is also the problem with social safety nets – the states have finally run out of money.

Can the tax decline rates be reversed?  It looks pretty unlikely when we look at state tax collections from 2009.  Only 5 states posted increases in tax collections.  Meanwhile, 14 states posted double-digit declines!

Change in State Tax Revenues 2009

Source: U.S. Census Bureau, 2009 State Government Tax Collections.

Here in the People’s Republic of California, us Komrades are looking at a projected $19 billion shortfall this year, and a $37 billion projected shortfall next year. (Source: The Globe and Mail)  Which makes you think the matter of defaulting, or getting bailed out by the Federal Government, is now merely a matter of “when”, not “if”.  It’s the Final Countdown.

Hat tip to my alert Komrade Carson for sending the Globe and Mail link along.


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  • Mike

    Hi, I came across your website. I enjoy the posts and will continue to follow the website. I also wrote about something similar on fool.com

    http://caps.fool.com/Blogs/municipal-bonds-in-distress/387526

    It is kind of a scatter segment, but I also do believe that the municipal market is not being properly priced into the stock market. The credit default market seems to recognize the unsustainable path that many of the states are heading.

    Recently I took a look at the Santa Barbra pension fund which shows approx. 58% funding. so for every dollar in obligations, they have .58 cents.

    I think at some point the market will recognize the issues at hand. I think that Greece was a glimpse of what California and the states are posing towards the US. Both Greece and California have ‘taxing power’, yet both are essentially bankrupt.

    IMO, I think the municipal market is the next subprime.

  • Brett

    Hey Mike, nice article on the Fool! And I agree completely – this is probably the last financial bubble in existence right now.

  • Pingback: Arnold Schwarzenegger Drops California State Workers to Minimum Wage — The Contrary Investing Report

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