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What's the true state of state finances?

US states are in rather poor shape, financially speaking, and California's latest debt downgrade has shined a light on this topic once again.

This brings us to today's question: are California's fiscal problems indicative of a larger trend toward deteriorating state finances and budget shortfalls?

I'd like to start out by thanking Gregor Macdonald and the Stocktwits gang for discussing some of these issues in the last Sunday's MacroTwits hour on Stocktwits TV and for sharing some of the links I'll be posting for you here today.

For an opener on why state finances are important, let's get a quick overview from Business Insider:

Last week we mentioned how states are still grappling with monster budget gaps, and that they'll inevitably resort to slashing spending to remain solvent.

This, of course, will be a drag on GDP, and act counter to any pro-stimulus efforts Uncle Sam will maintain."

They go on to cite (as Gregor did) the recent Rockefeller Institute report, "Recession or No Recession, State Tax Revenues Remain Negative" (PDF), which finds that the trend in state and local taxes has been "clearly downward" from its previous mid-decade highs.

An introductory paragraph from that report:

"During the third quarter of 2009, total state tax collections as well as collections from two major sources — sales tax and personal income — all declined for the fourth consecutive quarter. Overall tax collections in the July-September quarter
fell by 10.9 percent from the same quarter of the previous year.

We have compiled historical data from the Census Bureau Web site going back to 1962. Both nominal and inflation adjusted figures indicate that the first three quarters of 2009 marked the
largest decline in state tax collections at least since 1963."

Meanwhile, Reuters reports positive growth in sales tax collections for a group of states mostly concentrated in the Midwest. Unfortunately, they note that the numbers could change quickly for these states, as they benefited from federal bailouts of the automotive industry which, in turn, boosted local manufacturing activity.

, Mish has posted some comments and data on California and the states' finances that I found informative and would urge you all to check out. Here are some excerpted comments from Mish on state deficits and the large credit ratings agencies:

"In the United States, a fiscal crisis is hitting states like Arizona, Illinois, Kentucky, California, Virginia, and Illinois. California has a whopping 56% deficit as a percent of its General Fund Budget according to the
Center on Budget and Policy Priorities...

....There is little doubt California should be rated as junk already. Dick Larkin notes they give the states a lot of rope and wonders: "Frankly I can't understood why it took S&P so long."

...The big three rating agencies get paid on the quantity of debt they rate not the quality of their ratings. The higher they rate, the more business they get. For more on the problem as well as what to do about it, please see Time To Break Up The Credit Rating Cartel."

So there is a lot of material to look over here, but I hope this post will give you a pretty comprehensive start to any research you might want to do on this subject. I will continue to read through the Rockefeller Institute report and keep an ear open to your thoughts on "the true state of state finances". Have a great weekend, everybody.

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