DEC 22, 2015 @ 12:36 PM
Which Are Death Spiral States?
William Baldwin
CONTRIBUTOR Forbes
Opinions expressed by Forbes Contributors are their own.
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Does your state have more takers than makers? Check it out.
California has a powerful economy, with 14 million private-sector jobs. It also has burdens: welfare recipients (12.6 million), generously paid government employees (2.1 million) and people collecting government pensions (1.3 million).
Add up the numbers. There are 114 clients drawing from the government for every 100 people chipping in by working outside the government and paying taxes. We’re calling this the Feedme Ratio. Six states have a number over 100.
These states are at risk of going into a downward spiral in the next recession. The burdens will remain but too many of the providers—employers in the private sector—might shrink or decamp. Why add jobs in a state that asks each productive worker to carry not just his or her own weight but also the weight of one other person?
New York is on the list of at-risk states, with a Feedme Ratio of 108. New Mexico is in the worst shape, with 143 government clients for every 100 private-sector workers.
The three other states with Feedme Ratios over 100: West Virginia at 116, Mississippi at 111 and Arkansas at 103. You can check your state on this map.
The hazard with overburdened states is that the departure of jobs could someday turn into a rout. Just this is happening in Puerto Rico. Its productive citizens are leaving for the mainland. They are sticking a dwindling population of private-sector workers with the burdens of supporting the government’s clients and paying off the government’s debt.
Sunny, silicon-rich California is a long way from Puerto Rico’s fate, but the costs of keeping the government fed are on an ominous upward trend. A decade ago the top individual income tax bracket decreed by the solons of Sacramento was 9.3%; today, it’s 13.3%. The nice pensions for state and local workers in California are $189 billion short of adequate funding, according to an analysis by Moody’s. That pension debt comes to $13,500 for every private-sector job.
An employer would find Florida more hospitable. Per employee, the burden of unfunded pensions there is only one-fifth as high. The Tax Foundation calculates that Florida’s tax collections amount to 9.2% of the state’s economic output, versus California’s 11.4%. The Florida Feedme Ratio is only 69.
Did you get a job offer in California? Pause before taking it. When you buy a house there, you are incurring your share of the state’s obligations. You cannot walk away from them. In effect, you don’t really own that house. The state pension fund owns it. You are just a junior partner in the arrangement.
Years from now you may look for an escape. You may head for low-tax Florida. But potential buyers will be stepping into your shoes and will price their bids accordingly.
Buying bonds? California’s credit rating, Aa3 at Moody’s, isn’t as bad as it used to be (Baa1 during the economic crisis). But the Feedme Ratio is ominous. Keep your California maturities short.
If you are making a choice about where to locate a business, pick a safer state. Four have Feedme numbers below 50: North Dakota, Utah, Nebraska and New Hampshire.
If you have already invested in a risky state by owning a house or business, the best you can do is to pay attention to how politicians are spending your money. Open the Books, a project of a nonprofit called American Transparency, has assembled a 50-state database to make this task easier. Its file contains 2.4 billion entries for salaries, pensions and vendor payments. Among the gems in this collection:
–Connecticut has eight employees making over $1 million a year.
–A superintendent of a small Chicago-area school district (consisting of two elementary schools) got pay boosts at the end of her career and so arranged to collect a $210,480 annual pension.
–California has 13,496 state and municipal employees drawing salaries of $200,000 and up.
“Transparency is great, but unless people hold the political class accountable it doesn’t mean anything,” says Adam Andrzejewski, who runs Open the Books.
Our map of fiscal doom has, for each state, the Feedme Ratio and one illustration from OTB of a spending decision by the politicians.
Sources for the data that went into the Feedme calculations are the Bureau of Labor Statistics, the Kaiser Foundation (whose Medicaid survey is used for the welfare count) and the Boston College Center for Retirement Research. We added jobs on the federal payroll to the private sector number since they help pay a state’s bills.
A similar survey of states’ economic health published here three years ago included pension funding deficits in the risk ratios. This time the formula does not incorporate those deficits. Instead, we tabulate the pension problem here:
