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Saturday, January 19, 2008 10:53 AM

Grim News For State Budgets

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Reuters is reporting Recession creeps across U.S. Midwest states.

While economists and others debate the prospects of a recession in the United States, employment data suggest recession has already arrived or is knocking on the door of a few Midwestern states. The latest state to hit the economic skids is Minnesota.

"From our point of view, this looks like we are in a recession," said Minnesota State Economist Tom Stinson. He noted that the data were consistent with the standard definition of a recession in terms of duration and broad-based distribution of the job losses. "It's not narrowly concentrated, but spread across the economy," he said.

Michigan is in a single-state recession, according to Dana Johnson, chief economist at Comerica Bank in Detroit, who added he expected 2008 to mark the fourth straight year of recession for the state with high jobless rates and job contraction.

The state's December unemployment rate rose to 7.6 percent from 7.4 percent, the Michigan Department of Labor and Economic Growth reported Wednesday. The state's December rate was the highest among the 50 states.

The average monthly jobless rate for Michigan was 7.2 percent in 2007, the highest annual rate since 1993. Manufacturing was the biggest chunk of the 78,000 jobs lost last year in Michigan, which last experienced annual job growth in 2000.

Now, recession may be closing in on Ohio as well. A Jan. 10 report by the state's Office of Budget and Management said that December marked the third consecutive month in which initial jobless claims exceeded the level reported during the same period in a prior year.

"The last time that there were four consecutive months of initial increases in claims over the corresponding months in the prior year was at the start of the recession in 2000," the report said. "Initial claims data from the first week in January show no signs of slowing." Ohio's unemployment rate shot up to 6 percent last month from 5.6 percent in November.
Grim news for state budgets

A housing hangover has been grim news for many state budgets.
Red ink was showing up in as many as 20 state ledgers as the year began, and if the country dips into a recession, the number of states projecting deficits would certainly grow. "Clearly, it’s a little more gloomy than it was once was," Raymond C. Scheppach, executive director of the National Governors Association, said.

The stalled housing market is hurting states across the board, but it’s more severe for states such as Arizona, California, Nevada and Florida that rely heavily on real-estate taxes.

As 2007 ended, 19 states told the National Conference of State Legislatures that overall sales-tax collections were failing to keep pace with what forecasters had projected for early 2008, signaling that states may face budget shortfalls.

California is struggling to plug a projected $14 billion deficit for 2008-2009, while Florida is looking at a $2.5 billion estimated gap between spending and revenue. Other states facing shortfalls include Maine, Michigan, New York and Virginia.

“We’ve seen the peak in state balances,” said Corina Eckl, NCSL’s director of fiscal affairs, concluding that “state finances are in transition” and heading downward. States are worried about the amount of money coming in because they plan big-ticket programs in 2008. Health care, transportation and education rank as the top three priorities for states in the coming legislative year. Other looming costs are health care and pension benefits for retiring state workers, estimated to total $2.73 trillion over the next 30 years, and states are $731 billion short, according to the Pew Center on the States.
Revenue Worries

More states worry about revenues

The housing slump impacted revenue in 24 states this year and 18 say they are “concerned” about their revenue outlook, triple the number from last year, a new report released Dec. 10 shows.

The glum assessment from the National Conference of State Legislatures echoes similar concerns about state finances issued last week by the nation’s governors. The governors predicted as many as 20 states will have to patch holes in their budgets in 2008.

The stalled housing market is pinching state revenues in several ways. Arizona, Illinois and Maryland are among at least 13 states that blamed skimpier sales tax returns on the decline of the housing sector. A drop in home sales and prices mean states take a smaller cut in sales tax because most people who buy homes also purchase new appliances and carpeting and spend big money on home-improvements.

Minnesota, New Hampshire and New Jersey are among at least a dozen states that reported seeing declines in their real-estate transfer or recording taxes, according to the NCSL report.

Apart from the housing market, NCSL found that 19 states’ overall sales tax collections are failing to keep pace with what forecasters had projected. And seven are reporting gaps in their budget: Arizona, California, Illinois, Maine, Nevada, New York and Virginia.
States Tighten Belts

The Wall Street Journal is reporting States to Tighten Belts as Weakness Of Economy Cuts Into Tax Receipts.
Slower growth in tax revenues, the result of a weakening economy, are prompting governors from New Jersey to California to consider an array of belt-tightening measures to balance their budgets for this year and next.

Facing a severe revenue shortfall, Kentucky Gov. Steve Beshear has asked most state agencies to trim their spending by 3% in the current fiscal year, which ends June 30. New Jersey Gov. Jon Corzine has proposed raising tolls and freezing spending to reduce his state's debt.
Ohio Wants To Downsize

Ohio Governor Ted Strickland proposes worker buyouts.
Ohio officials consider closing institutions, making deep cuts to offset gloomy financial outlook. Gov. Ted Strickland has asked his agencies to look into offering employees early retirement incentives to save money in light of a potential recession and continued state budget problems.

Agencies were told Jan. 7 to begin looking at ways to trim their work force by offering to purchase additional years of service for long-term classified, primarily union, employees, allowing them to retire early. In the memo from J. Pari Sabety, Strickland's director of the Office of Budget and Management, it appears the administration is contemplating closing some state institutions or laying off relatively large numbers in state departments.
Schwarzenegger's one size fits all budget reduction

California is sweating a 10% across the board spending cutback. This is not the correct approach. My solution is outlined in Mish's California Budget Proposal.

Sad State of Things In Ohio, Kentucky and New Jersey

Crain's Cleveland is talking about the State of Things.
Facing a severe revenue shortfall, Kentucky Gov. Steve Beshear “has asked most state agencies to trim their spending by 3% in the current fiscal year, which ends June 30,” according to the newspaper. “New Jersey Gov. Jon Corzine has proposed raising tolls and freezing spending to reduce his state's debt. And California Gov. Arnold Schwarzenegger, in a bid to avert a deficit in the coming fiscal year, has proposed closing state parks, eliminating dental care for the poor and cutting $4 billion from the state education budget.”
California and Florida in Recession

The Financial Times is reporting California and Florida feared to be in recession.
California and Florida, two of the most important states in the US, are either in recession or on the brink of it, many economists now believe.

The two states together account for nearly two-fifths of US gross domestic product. California alone would rank among the world's top 10 economies, while Florida would rank in the top 20.

California and Florida, along with Nevada and Arizona, represent a new group of housing boom-turned-bust states that could experience regional recession even if the US as a whole escapes with a period of very weak growth.

Their plight is likely to be a big issue in the presidential primary campaign.

Sales of existing homes fell 36 per cent in California and 30 per cent in Florida in the year to November 2007, while median sale prices fell 12 per cent in California and 10 per cent in Florida.

Both states have large inventories of unsold homes. California's high-cost property is particularly vulnerable to the continued dysfunction in the jumbo, or large-denomination, mortgage market.

Labour market data show that job creation stalled in both states from August onwards.

Ross DeVol, a member of the California Controller's Council of Economic Advisers, told the Financial Times he believes California is now in recession. Mr DeVol said the strike by Hollywood screenwriters, now in its third month, was the "straw that broke the camel's back".

Evidence for a recession in Florida is even stronger, with retail sales tax receipts - a proxy for consumer spending - down 5 per cent year on year in November.
Unemployment Rises Sharply In California

The San Francisco Chronicle is reporting California's jobless rate up sharply.
California's employment market took a sharp turn for the worse in December, the strongest sign to date that the state's economy might be falling into recession. The state's unemployment rate catapulted to a seasonally adjusted 6.1 percent, half a percentage point higher than the November level, the California Employment Development Department reported Friday morning.

"That's a big jump," said former department Director Michael Bernick. In December 2006, the state jobless rate was 4.8 percent. The state unemployment rate last month was well above the 5 percent posted for the United States as a whole and tied for fifth highest in the nation, trailing only Michigan, Mississippi, South Carolina and Alaska.
Unpleasant Choices

States have only two choices here: Cut programs or raise taxes. Both choices will cause pain. But the pain can no longer be put off.

In Deflation American Style I warned "Look for steeply rising unemployment in the US. One of the consequences of those debt writedowns in the US, is that US corporations will be forced to cut expenses. The biggest expense for many companies is employees. Japan had far more loyalty to its employees than US corporations ever will."

Well here we are. It's payback time for 8 years of of the most reckless spending the world has ever seen.

Unemployment is only beginning to rise. Think layoffs aren't coming from retailers after this dismal Christmas Shopping season? Think again? Think layoffs aren't coming when state budgets are cut? Think again. Think layoffs aren't coming when this last ridiculous round of overexpanded commercial real estate is finished? Think again. Think Bush's plan to jump start the economy with a $150 billion program will accomplish anything? Think again.

Here is the reality: Unemployment is going to soar and Fiscal "Stimulus" Is Doomed To Fail. California and other states will have to go back to the well again and again to trim budgets as state revenues from sales tax, property tax, and income tax fails to hit expected targets. Anyone who thinks this is inflationary, needs to think again.

Mike "Mish" Shedlock
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