Most states are financially healthy
Most states’ financial health is looking up, thanks to the long bull market in stocks and a decade of steady economic growth that has lifted tax receipts. Most are boosting spending this year while still adding to rainy-day funds. Outlays are up 5% on average. But some are in better shape than others. And many face long-run fiscal challenges.
Who’s Recession Ready?
How ready are states for another recession, whenever it arrives? The Great Recession forced painful cuts that took years to recover from. 29 are well prepared, with enough saved in reserve funds to ride out a moderate recession without having to cut services or lay off employees. 13 would face modest budget deficits because their reserve funds aren’t quite large enough.
Eight are seriously unprepared, which means that even after tapping reserve funds, they’d still need to impose hefty budget cuts or tax hikes to make up for lost revenue and extra, recession-related costs. The eight are:
- New Jersey
- New Hampshire
The story is similar with state pensions: Overall improvement with some notable laggards. Strong investment returns have boosted the median funding ratio…the fraction of what is needed now in order to deliver promised future benefits…to 72.5%. But four state plans…those of N.J., R.I., Pa. and Hawaii…are below 60% funded. Three…Ky., Ill. and Conn…are less than 40%.
Health care expenses are a long-term worry. States spend an average of 20% of their budgets on Medicaid, a level that will keep rising. Also, most don’t save enough to cover their future liabilities for retired employees’ health care costs. One analysis found that for states to cover both future Medicaid and employee health obligations, they’d need to raise revenues by 4% per year, cut costs by 3% per year, or employ a mix of the two…for the next 50 years. Even if the feds step in with extra Medicaid funding, that money would likely trigger reduced federal aid for other programs states operate.
All of these problems will have to be grappled with sometime in the future. For now, state finances remain sound. 41 states have credit ratings of AA or higher. Only one state, Ill., carries a rating lower than A-. State and local bonds remain in high demand due to their tax advantages, which means that governments looking to finance infrastructure projects will be able to borrow at low interest rates. And bond investors needn’t worry about a wave of defaults hitting their portfolios.
But the future could arrive quickly. The next economic downturn or drop in the stock market…a matter of when, not if…will expose any fiscal weaknesses… for instance, pension plans that look well funded now, thanks to high asset prices. State pension plans are counting on a rather lofty average annual return of 7.25%. One bad bear market could render many plans woefully underfunded very quickly.
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Spend time looking at what you are trying to acquire, develop, or sell to learn how you can improve the success of what you are offering. Parker Associates helps understand the consumer by answering WHO will buy, WHAT they will buy, and HOW they will buy it. When the research is completed and the analysis is done, having the answers to these questions will reveal what will provide the best success for your project. Keep asking WHO, WHAT, and HOW and keep developing to fit the need.
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David WB Parker is a principal of Parker Associates of Jacksonville, Florida, marketing consultants to the real estate industry; President of PTC Computer Solutions, IT Specialist, and an active real estate sales professional with Barclay’s Real Estate Group based in Jacksonville, FL. He can be reached at 904-607-8763 or via email email@example.com.