Municipal Tax Base and Pension Fund Update (Milken Institute, Northwestern and SF Fed Info)

If you've been following the public finance crisis on my blog during the past 2 years, nothing has really changed. State governments and local municipalities are being squeezed by lower tax revenues (offset by tax hikes) due to the great recession, debt-deflationary drag, foreclosures, lower property values, unemployment and slower economic activity. Read: Lower Property Values Hit City Revenues (WSJ).

Analyst Meredith Whitney sees darkness ahead for the States: Whitney Says States May Need Federal Bailout in Next 12 Months (Bloomberg video). State credit default swaps, or insurance on State debt (see Illinois, California) have premiums almost as high as GreecePortugal and Ireland who are going through a similar situation. Chris Mier of Loop Capital disagreed with Meredith Whitney. On Bloomberg TV he said States "have their own resources, are sovereign and have deep powers to tax". Focus on local units of Government since "they have less resources, they have smaller economies and have limited abilities to tax"See the Bloomberg video here. Either way, get ready for a spike in taxes or a Federal bailout.

The Milken Institute has a report out on how to solve the muni-crisis titled "Ensuring State and Municipal Solvency". Here are key data points and a chart showing rising health care expenditures.
Key data points on the state and municipal budget situation include:

At the aggregate level, state and local government pensions suffered losses of $835 billion during the 2007-08 financial meltdown. Through the first quarter of 2010, less than 50 percent of those losses had been recouped.

In FY2000, half the states had fully funded pensions; by FY2008 only four (Florida, New York, Washington and Wisconsin) had fully funded plans.


Health-care costs at the state and local level are expected to double by 2050.
This chart is from the San Francisco Federal Reserve. It looks like Illinois, Arizona, Nevada, New Jersey, Vermont, North Carolina and Maine will be 30%+ short on their projected 2011 budgets.




Joshua Rauh, Associate Professor of Finance at Northwestern, put out a research piece about State pension funds titled "Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities".
There is substantial cross-sectional variation in the health of the pension plans. Assuming 8% asset returns, Illinois would run out in 2018, followed by Connecticut, New Jersey, and Indiana in 2019. Five states never run out, including New York and Florida, and 17 other states have a horizon of 2030 or beyond. If all states experience 8% average returns, 20 of the states will have run out of pension money by 2025. If the average returns are 10% then only 11 will have run out by 2025. If returns are 6% then 31 will have run out by 2025.
Also this just out.
"Associate Professor Joshua Rauh estimates that cities and counties add $574 billion to the $3 trillion in unfunded liabilities from the states" [link]

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