First boom, then bust, then more bad luck. That’s how analyst Meredith Whitney views those states that experienced the meteoric rise, then fall of their housing markets in the last decade, spending the extra tax revenue during the boom times but not cutting back after the bust. She calls it “the negative feedback loop from hell” in her new book, Fate of the States: The New Geography of American Prosperity.
“Nevada and all across the United States, cities and states that were once flush with cash are running out of money needed to pay for libraries, safe streets, clean drinking water, and yes, schools,” writes Whitney. “Even worse, the debt they’ve rung up in order to close budget gaps are threatening governments’ ability to deliver these basic services not just today but also in the future.”
Whitney doesn't buy the reported good news about California, which turned a $60 billion deficit into a $1.2-$.4 billion surplus three years later.
She tells The Daily Ticker, “Underneath the surface you would be shocked to see how they [California] got there. “They raised taxes and did it retroactively… a lot of people booked 2013 gains into 2012 because of tax incentives… and they’re cramming down state expenses onto local communities without providing local communities the resources to pay for them… They are not paying into their pension funds adequately… and they’re still cutting from education…. It’s so much worse than the rosy picture that the headlines suggest.”
Whitney says a lot of states are adopting similar maneuvers, even Texas which she also praises in her book. “Texas needs to spend a lot on education and continue to spend a lot on infrastructure,” says Whitney. She notes that the Lone Star state “has one of lowest high school graduation rates in the country” and “that will be very expensive long-term for the state.”
Whitney says Illinois and New Jersey are the “worst” states when it comes to the negative feedback loop “because they have been doing it the longest.” Illinois’ public pension systems are the most underfunded among all U.S. state pension systems, with assets equal to just 43% of liabilities, meaning the pensions are 57% underfunded. Last week, the Illinois state legislature ended its latest session failing to adopt any type of fix, so Fitch Ratings downgraded the state’s credit rating, which is already the lowest in the nation.
New Jersey’s public pensions are better funded than Illinois’ pensions but that’s not saying much. Public pension assets in New Jersey cover only about 65% of liabilities leaving the state $47 billion in the hole as of fiscal 2012.
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