The recession is causing long-term problems for the states, including budget deficits, service cuts, and public-worker pension shortfalls—none of which will disappear quickly. They will, however, raise pressure for tax increases. A third of states have already raised taxes this year, and more will be forced to do so. Significant cost and service gaps among the states will make retirement relocation decisions increasingly important. Here are some key variables that may affect where you want to live:
Budget problems. If you live in Montana, North Dakota, or Wyoming, congratulations: According to the Center on Budget and Policy Priorities, you live in the only states that have no budget deficit. Collectively, the states are looking at more than $350 billion in red ink over the next few years and the federal stimulus package represents a band-aid but no cure. "It may be particularly difficult for states to recover from the current fiscal situation," the Center on Budget and Policy Priorities said in a recent study: "The decline in housing markets has already depressed consumption and sales taxes as people refrain from buying furniture, appliances, construction materials, and the like. Property tax revenues are also affected, and local governments will be looking to states to help address the squeeze on local and education budgets." According to the center, here are the five worst states in terms of fiscal-year 2009 budget shortfalls as a percent of general fund revenues: California, 35.5 percent; Arizona, 34.8 percent; Rhode Island, 24.5 percent; Florida, 22.2 percent; Illinois, 21.4 percent.
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Unemployment. State unemployment rates are a solid predictor of future fiscal pain. While unemployment is high throughout the country, some states stand out. The Wall Street Journal's Real Time Economics blog recently looked not only at state jobless levels, but also at how close they are to all-time highs since 1976, when state numbers first were collected. Four states—South Carolina (11.5 percent), Rhode Island (11.1 percent), North Carolina (10.8 percent), and Georgia (9.3 percent)—are also at all-time highs. Other states flirting with that distinction: Oregon—12.0 percent versus a high of 12.1 percent in 1982, and California— 11.0 percent versus a high of 11.2 percent (reached the previous month).
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Pension funding. Taxpayers can count on being asked to help shore up public-employee pension programs. The Wall Street meltdown rocked state and local pensions, but the scale of the problem has not been fully measured. Long reporting lags mean that complete year-end 2008 state and local pension plan conditions won't be tabulated until the spring of 2010. But even a partial portrait is not a pretty picture. Wilshire Consultants issues an annual report on state retirement systems. Its March report looked at 125 pension systems but noted that only 59 reported conditions as of June 2008 or later. Even including older data, the 125 plans' ratio of pension assets to liabilities declined a hefty 12 percentage points, from 96 percent in the 2008 report to 84 percent in the 2009 report. Looking at the 59 plans with more current data, Wilshire said their average funding ratio dropped from 88 percent to 77 percent. That percentage decline translated into a dollar shortfall of $237 billion for the 59 plans, compared with $113.5 billion the previous year.
Jean-Pierre Aubry, a research associate at the Center for Retirement Research at Boston College, has analyzed the pension tax burden in each state. "Even without the most current data, we know that basically all plans had roughly the same amount in equities and lost about 30 percent on the market," he says. "To the extent that all plans will have to increase their contribution level due to the market crash, those who historically have higher required contributions relative to their tax revenue, will find it harder to increase their contribution level." Aubry breaks the states into two groups—14 states with a legal restriction on pension contributions, and 36 states without a restriction. The first group, he reasons, "are less likely to feel the hit, because although the market downturn has adversely affected their assets. They are less likely to increase contributions to the pension plan because of the statutory restrictions."
Among the 14 states with statutory pension contribution limits, Nevada's annual required contributions were 17.2 percent of total state tax revenues in 2006, following by Ohio at 13.1 percent, Oregon at 12.4 percent, and Colorado at 11.4 percent. In the larger group of 36 states without statutory funding restrictions, Montana's annual pension contribution equaled 19.2 percent of state tax revenue, followed by Alaska at 16.9 percent, Illinois at 12.9 percent, Missouri at 11.2 percent, and West Virginia at 10.4 percent.
Fiscal distress. The Kaiser Family Foundation has a useful set of state information related to economic, social-service, and health-care spending. It has developed a "fiscal distress" ranking of the states, using state-by-state numbers for home foreclosures, unemployment, and food stamps. Nevada is the nation's most stressed state based on these variables, followed by Florida, California, Oregon, and, tied for fifth, Arizona and Georgia.