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Published: November 5, 2010
Here's a bit of
good news: states have been able to collect roughly +2.5% more
in taxes in the first half of 2010 compared with a year earlier.
Then again, most states are staring down the barrel of massive
budget deficits for 2011 and 2012, and a few percentage points
here or there does little to change the frightening math.
Dire as their situations may be, most states had been assuming
that Washington would again plug the gaps with federal aid. And
as long as Washington was there to help, states would likely
avoid the need to further eliminate jobs among teachers,
firefighters, police officers and other local and state
employees. This week's election now makes any further stimulus
very unlikely.
As I've recently noted, states are dealing with high
unemployment rates, along with large unfunded pension deficits.
With Governors and state legislators getting the message that
new taxes are a non-starter, many state and local governments
will have no choice but to trim payrolls even further. Thus far,
they've only taken baby steps. Since December 2007, the private
sector has shed about 6.6% of its workforce, according to a
recent study by the Rockefeller Institute. In that time, state
payrolls have stayed flat, while local government payrolls have
shrunk by -1.6%. (The cuts would have been equivalent at about
-0.8% each were it not for the fact that a large number of
teachers were transferred from local government payrolls to
state payrolls during the recent fiscal stimulus aid plan.)
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Closing the gap
States collected -15% less taxes in fiscal (June) 2010 compared
to two years ago, due in large part to lower levels of
sales tax revenue and fewer real estate transactions that
yield one-time mortgage and real-estate title transfer fees.
States have raised a number of taxes and excise fees, resulting
in an additional $4.9 billion in revenue in the second quarter
of 2010 compared with a year earlier, according to the
Rockefeller Institute. But it's unclear if any further tax hikes
will pass muster in these tough times.
Even in the absence of further state and local tax hikes, we can
assume that revenue will continue to rebound, albeit at a slow
pace, perhaps closing cutting that -15% drop in revenue in half
by 2013. That means that if states took no action, they would
run large deficits again in 2011 and 2012 and steadily smaller
deficits after that. More robust economic growth in 2011 and
2012, with
GDP growing in excess of +3%, could quickly turn things
around, as the impact on state and local taxes is doubly
sensitive to any directional GDP moves -- but few expect to see
this kind of growth any time soon.
But states must balance their budgets each year, so waiting for
a revenue turnaround is not an option. The only option is to
sharply cut costs by further paring services and state and local
jobs. Voters have just tacitly voted in favor of such a move,
and it will be interesting to see how they react once such cuts
take place.
What kind of numbers are we talking about? States employ about
5.2 million people, while local governments employ roughly 14.3
million. Assuming states need to cut their staffs by an
additional -5% and local governments by about -3%, then we're
talking about 680,000 jobs. In normal economic times, the
private sector would create about that many jobs in about four
months. But in the current economic environment, it may take
12-18 months of private sector job creation to simply offset
those losses, so there's a real chance that the national
unemployment rate moves up above 10% once public sector layoffs
take place. (Forecasts for this Friday's employment report call
for 60,000 jobs to have been created in October and the
unemployment rate to stay unchanged at 9.6%.)
Action to Take --> If you were banking on a jobs rebound helping
your portfolio, don't hold your breath. Private sector layoffs
may have eased, but the public sector cuts have already begun.
State and local governments shed a collective 83,000 jobs in
September and will likely need to keep doing so at a similar
clip during the winter months. The October jobs report may show
a temporary slowdown in this trend as budget planners awaited
the outcome of national elections.
Republican Governors have replaced Democratic Governors in
Wyoming, New Mexico, Oklahoma, Kansas, Iowa, Wisconsin,
Tennessee, Michigan, Ohio, Pennsylvania, Florida and Maine.
These newly-elected officials likely campaigned on a platform of
belt-tightening, and we're likely to hear of specific
budget-cutting plans in the weeks to come. How investors react
to the likelihood of rising public sector unemployment will
largely be a function of any gains made in private sector
employment. This Friday's jobs report could set the tone for
that coming debate.
-- David Sterman
Staff Writer
StreetAuthority |
