Why State Finances Are Worse Than We Thought

[Valin]

Wall Street Cheat Sheet:

Emily Knapp
6/9/11

In a report issued Thursday to her clients, banking analyst Meredith Whitney warns that current state finances are much worse than people think. According to Whitney’s report, future deficits need to be closed through tax increases or cuts in spending on social services. Worse still, Whitney warns that debt levels are in fact significantly higher than official estimates.

Whitney’s report, which covers 25 of the largest states in the U.S., shows that state governments have raised annual outlays from $1.5 trillion to nearly $2.2 trillion, an increase of $700 billion in spending, while tax receipts have risen $300-400 billion, to $1.4 trillion. Throughout the recession, spending has continued to rise even though state income has remained flat.

Forty-six states must balance their budgets for the fiscal year ending this month, but on average, taxes will fall 36% short of revenue. So states are receiving money from the federal government through the American Recovery and Reinvestment Act, which has given out $480 billion in grants and contracts since it was passed in 2009. But that money still wasn’t enough, and the stimulus is set to expire this month, so states have had to dip into emergency funds created from prior surpluses, as well as increase their issuance of General Obligation bond securities, incurring long-term debt in order to keep the state operating in the short term. Today, debt service takes up half of Nevada’s budget, 40% of Michigan’s, and over 20% of the budgets of Arizona, California, Connecticut, Ohio, and Illinois.

(Snip)

Have a nice day.