STUMP » Articles » Public Finance: Guys, It's Not Really a Competition as to Who is the Worst » 16 October 2017, 21:49

Where Stu & MP spout off about everything.

Public Finance: Guys, It's Not Really a Competition as to Who is the Worst  


16 October 2017, 21:49

I’ve seen a theme lately.

“At least we’re not as bad as THOSE guys!”

Look, just as a parent tells their children “You’re ALL my favorite”, I’m here to tell you that multiple states (and towns and cities and counties) are in a world of pain. It doesn’t really help to say that city/state is more bankrupt than you are, because it’s not a competition.

Now, they should keep calm, because panicking over the situation is not going to help.


Does New Jersey’s Next Governor Want to Live in Connecticut?

The Garden State should learn from Hartford’s bad example: You can’t tax your way to prosperity.

No matter what this year’s gubernatorial candidates may say, painless solutions to New Jersey’s fiscal challenges don’t exist. The state’s budget may be balanced on a “cash” basis, but a massive structural deficit lurks beneath. New Jersey’s property taxes, already the highest in the nation, are being driven up further by the state’s pension burden and escalating health-care costs for government workers.

Some politicians seem to think New Jersey can tax its way to budgetary stability. At a debate this week in Newark, the Democratic gubernatorial nominee, Phil Murphy, pledged to spend more on education and to “fully fund our pension obligations.” But he refused to say whether he would extend a soon-to-expire 2% cap on raises for firefighters and police, even though it is credited with keeping property taxes in check. Polls show Mr. Murphy is leading his Republican opponent, Lt. Gov. Kim Guadagno, by double digits. But just taxing more would risk making New Jersey’s fiscal woes even worse.

A useful comparison is Connecticut, which has tried to tax its way out of a similar set of problems. The two states have much in common: a relatively low poverty rate, high levels of personal income, a dependence on New York City, and unsustainable pension costs. The Pew Charitable Trusts ranks New Jersey and Connecticut as having among the worst-funded pensions in the nation.

Some of the richest people live in New Jersey & Connecticut. (There are some poverty problems in both states, btw, but it’s concentrated in places like Hartford proper and Trenton.)

The difference is that while New Jersey has held the line on taxes lately, Connecticut has enacted three substantial tax increases since 2009. They haven’t solved the state’s problems. Deficits have continued to recur, and Connecticut lawmakers are arguing even now about how to close a $3.5 billion gap for the next two fiscal years.

I will do a later post on the nonexistent Connecticut state budget.

But the tax increases do appear to have dampened Connecticut’s economy. Only this past June did the state finally regain the private-sector jobs it lost during the Great Recession, more than three years after the nation as a whole did, and over a year after New Jersey. Still, big business is fleeing Connecticut: General Electric and Aetna are moving their corporate headquarters elsewhere. The latter was an especially hard blow, given that Aetna was founded in Hartford more than 150 years ago and helped turn the city into an insurance hub. “The state’s persistent financial woes and refusal to recalibrate to 21st-century realities have been pushing out people and businesses for years,” the Hartford Courant lamented.

I am a bit skeptical about either of these being due to taxes.

General Electric is moving its HQ to Boston, not known for its low taxes or costs.

Aetna is moving its HQ to Manhattan. Again, not known for low taxes or low costs.

The difference, to a certain extent, is that both Boston and Manhattan are cooler than any location in Connecticut.

ESPN is still headquartered in Connecticut. Not that it’s doing all that well.

Connecticut has found that taxing wealthy residents has limits. Although the top income-tax rate has risen from 5% to 6.99% since 2009, the state has also found it necessary to tap the middle class. Lawmakers raised income taxes on filers making as little as $50,000. Property taxes are already the second highest in the nation, but they’ll go even higher if Mr. Malloy’s plan to shift teacher pension costs goes through.

They’re not just taxing residents, but also people like me, who live outside the state and work in CT.

Connecticut’s experience shows the folly of taxing the middle class to support platinum benefits for the public workforce while shifting the burden of legacy pensions onto future taxpayers. The result has been a slower economy and no serious drive to address the underlying problem, namely the constantly escalating cost of government. If New Jerseyites think things can’t get much worse, they ought to look a little to the northeast.

The thing is, New Jerseyites would look up to CT and think “That’s not all that bad.”

Because neither people in New Jersey nor Connecticut seem to believe unfunded pension liabilities are real debt.


An aside, I saw that the federal tax proposal put out there by Trump & some Republicans would remove the deductibility of state and local taxes.

I will put this infographic from the Tax Foundation here:

And I will blog more about that later.

New York is #1 there. So sure, tell me that Aetna moving to NY is about taxes. That’s a good one.

I think it’s more about which locations are cool, and Connecticut is distinctly “unhip” as the youngsters from an era from before I was born would have said.



Illinois May Be The Weakest State, But Watch For Others

Connecticut and Pennsylvania are still without budgets four months into their fiscal years. It’s too soon to compare either state with Illinois, which recently went two years without a budget. But municipal market investors should be aware that prolonged disputes of this type are can be a harbinger of longer- term credit decline.

Neither state wants to be known as the next Illinois. As recently as eight years ago, Illinois was rated in the AA range by S&P Global Ratings. But as deficits increased and pension funding deteriorated, its bond ratings steadily declined. The state’s diminished financial and economic strength caused political infighting and a budget stalemate that wasn’t broken for two years. Finally, in July 2017 the state was in danger of losing its investment grade ratings from the credit rating agencies. The state legislature overrode the governor’s veto and approved a budget.

Illinois leaders never expected to go two years without a budget, and those in charge of Connecticut and Pennsylvania don’t expect to either. If either state is to keep its credit situation from deteriorating further, it needs to adopt a reasonable budget very soon.

The budgets themselves aren’t exactly the problem.

It’s the debt overhang. And they all suck.


From Truth in Accounting: Comparing the best and worst state for financial health

Alaska and New Jersey aren’t just opposites when it comes to their geographic location in the U.S., but their financial condition as well.

Truth in Accounting’s annual Financial State of the States report found Alaska ranked No. 1 in the nation for fiscal health, boasting a Taxpayer Surplus of $38,200. That means the Last Frontier state not only has money aplenty to cover the cost of all current and future bills, but also enough cash to give each Alaskan taxpayer a pretty payout—if only that’s how things worked.

Well, actually, taxpayers in 41 states probably wouldn’t be too happy if that’s the way things worked, especially in New Jersey, which ranked dead last in our report and received an “F” grade for its whopping $67,200 Taxpayer Burden.

While there are many economic and demographic differences between New Jersey and Alaska, it’s important to note the latter long has benefited from oil revenues to prop up its state budget and pay its bills. But low oil prices and a $2.1 billion decline in investment income since 2015 have weakened the state’s fiscal health.

In New Jersey, like many other states with a high Taxpayer Burden, unfunded pension and retiree health care liabilities have put a severe strain on the state’s finances; and the Garden State’s largest sources of revenue—income, sales and property taxes—won’t do much to alleviate its fiscal woes.

Now, I cut out the graphs they displayed, because I don’t like them.

I’m gonna make my own graph.


DATA NOTES: The data are available via State Data, and I decided to graph a few things from that data. Or, rather, I took their state of the states report from this year, made a few graphs to get numbers, and crossed it up with other data I have.

The problem with ranking lists, which they attempt to get around, is that it creates a linear scale where many of the states will be bunched up in their deficits/debts.

They worked this by making a nice bar chart along with their ranking list, and making grades based on the per-taxpayer burder.


So here’s my first stab: a histogram of the taxpayer burden:

Negative numbers means that more needs to be thrown into the money pit that is government debt. Positive numbers are the good states — these numbers are intended to represent the burden on a per-taxpayer basis, which, remember, is not the same as per capita. My household, composed of 5 people and a dog, counts as one taxpayer.

So a total of ten states are running a surplus under Truth in Accounting’s calculations. YAY!

But 17 states have taxpayer deficits of $12,000 or more.

But you know, $12,000 of a per taxpayer deficit means very different things in New York versus West Virginia.


Using info from the Tax Foundation, I grabbed average adjusted gross income.

Here’s the next histogram:

So now we’re looking at this as a percent of average AGI. Obviously we still have 10 states in surplus, but the histogram looks a little different, but not much. We have 18 states with taxpayer burdens at or greater than 20% of average AGI.


So here’s something: is there a relationship between this per-taxpayer burden and the taxes already imposed?

Perhaps those with large deficits simply haven’t taxed hard enough!

So I grabbed info on state/local taxes as percent of personal income – that’s from 2014, not 2016, but I figure that’s close enough.

Let’s graph!

I made a few changes in this one: I cut out the 10 states with surpluses, and I switched the deficit numbers to positive signs.

Let me talk about a few of these points:

New York — unsurprisingly, there’s a huge tax burden. Whee. And its per-taxpayer shortfall is a “mere” 25-ish% of average AGI.

New Jersey – woo whee, that’s awful. Its taxpayer overhang is 80% of average AGI. It’s got a high state/local tax burden, but not as high as New York.

Illinois – Not quite as bad as New Jersey. That should be their state motto. If it were an actual selling point… like one would be making the choice between the two states.

Kentucky – so here one might argue they’re undertaxed given their huge debt.

Connecticut – so CT has about the same tax burden on a personal income level as NJ and IL. And their deficit is less. I guess one thing Connecticut can be happy about… given they don’t even have a budget yet.

I decided to do a quick correlation to see if anything fell out, If I include the surplus states, the correlation is essentially 0. If I remove those 10 states, the correlation jumps up to 42%.


I did a rank correlation with the surplus states in, and got a 26% correlation; rank correlation on the censored data was 49% correlation.

Anyway, the higher the tax burden as percent of personal income, the higher the taxpayer deficit, in general… if you ignore all those states with surpluses.

Anyway, I have material on Connecticut’s lack of budget, Kentucky’s pension maneuvering, and much more… hope to get to them this week!

Underlying spreadsheets

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