Thursday, September 11, 2014

September, 2014 By the Numbers, Part 1: Sinkhole States Vs. Sunshine states

On a semi-regular basis we do a series under the theme, “By the numbers.” In this series we look at the latest statistics, trends, and facts that are going on in this country, usually focusing on how the American political class, via their ineptness at doing anything right, is constantly screwing up our lives, our economy, and our democracy, based strictly on the reality of the numbers at that time.

I once worked for a boss whose favorite saying was: "There is nothing more devastating to an opinion than the correct number.” Politicians do not like to deal with numbers, it messes up their political message and spin as they try to create a different, false reality in our minds. However, the numbers are the numbers and the reality of our lives, numbers devastate opinions.

A famous NFL football coach once said you are only as good as your record. You might think you have a great, talented team with excellent coaching but if you have a losing record, than the reality is that you do not have either a talented team of excellent coaching, the numbers, unlike politicians, do not lie.

More importantly, you cannot expect to resolve an issue or make life better and easier for Americans if you do not have the right, correct numbers to tell us where we are within the reality of those issues. For example, claiming the economy is doing great, even though almost twenty million Americans are still looking for good employment, does not allow you to focus on that twenty million number. The false claim forces you to waste time and resources trying to create the false impression that the economy is doing well. It diverts attention and problem resolving resources and attention to the lie and not reality.

So let’s take a few days and go “by the numbers” to see where America’s reality truly is today.

1) It is no secret that the Washington political class has brought the country to the brink of bankruptcy. Its outlandish and wasteful spending habits has given rise to an unbelievable $18 TRILLION national debt. This is equivalent to a debt burden of about $56,000 for every man, woman and child living in the country today.

But state level politicians have also done a pretty good job in certain states running up very high debt levels, levels that will have to be paid at some point in time by the residents in those states. The Heritage Foundation recently took a look at some numbers that were put together by the Truth In Accounting organization which looked at state government debt burdens across the country:
  • Truth In Accounting is a Chicago based non-profit that developed a measurement/set of numbers that calculated the amount of money each taxpayer in their state would have to pay to eliminate the financial debt hole the state government has gotten itself into.
  • Taxpayer burden was estimated by determining each taxpayer’s share of state debt after setting aside capital-related debt and assets, leaving primarily unpaid pension and retirement health promises.
  • Their report identified the so-called “Sinkhole States,” these are states that will put the highest debt burden on their states' residents.
  • The states with the worst debt numbers according to their analysis are Connecticut, Illinois, New Jersey, Massachusetts and Hawaii with Connecticut being the worst and Hawaii being the fifth worst.
  • The analysis also identified the best states, the so-called Sunshine states from a debt load perspective.
  • These best states start with Alaska being the most debt burden free or who have no debt followed by North Dakota, Wyoming, Utah and South Dakota.
  • In other words, Sinkhole States have substantial unfunded pension liabilities to be paid by future taxpayers while Sunshine states, states with taxpayer surplus or littke debt, fund pension costs and other state costs during the year employees earn the benefits, and the money is set aside for that year.
  • Connecticut has an overall budget shortfall of $61.4 billion, which breaks down to $48,100 per taxpayer.
  • Thus, the state debt level debt burden for Connecticut residents is almost equivalent to the amount of money those residents would owe the Federal government to pay off the Federal debt.,
  • Truth in Accounting concluded from their analysis that most of Connecticut’s state employee retirement benefits have been promised but not funded.
  • At the other end of the spectrum, Alaska was found to be in the best financial shape with a budget surplus of $13.5 billion, or $46,900 per taxpayer. Thus, Alaska has enough money to pay state employees’ retirement benefits and other outstanding bills with currently saved funds, placing no debt burden on future residents.
  • The report concludes very simply that states like Alaska and other Sunshine states are in good financial shape because the legislators and governors have only promised citizens and employees what they can afford to deliver. 
We are really, really screwed as American taxpayers when you look at the debt numbers around the country. We have allowed the American political class to overspend what the country could afford. At some point, probably pretty soon, this debt bomb is going to explode at either a state level or the national level with devastating downside effects. The numbers do not lie, even if politicians do.

2) But maybe things have started to explode already. Let’s take the Truth In Accounting analysis to a few different levels and see how the numbers compare. 

Let’s stay with the Sinkhole and Sunshine states identified above and look at the current unemployment rates in each state:

Sinkhole States:
  • Connecticut - 6.6%
  • Illinois - 6.8%
  • New Jersey - 6.5%
  • Massachusetts - 5.6%
  • Hawaii - 4.4%
Sunshine States: 
  • Alaska - 6.5%
  • North Dakota - 2.8%
  • Wyoming - 4.4%
  • Utah - 3.6%
  • South Dakota - 3.7%
Thus, unemployment levels in four out of five Sunshine States are well below the national average (6.1%) while the Sinkhole States have three states out of five above the national average. Could it be that there is a direct relationship between out of control state government spending and the financial health of that state. i.e. the bigger the debt burden the higher the unemployment rate? Possibly, based on these unemployment numbers and realities so let’s explore this hypothesis further.

3) A recent number analysis by the Tax Foundation looked at the relative value of $100 across the country. A state level value of over $100 would mean that the buying power of residents in that state have more buying power relative to a $100 benchmark. A state who had a value under $100 would be getting less value for their money.

Let’s see what the value of $100 is both the Sinkhole states and the Sunshine states:

Sinkhole States:
  • Connecticut - $91.41
  • Illinois - $99.40
  • New Jersey - $87.64
  • Massachusetts - $93.28
  • Hawaii - $85.32
Sunshine States: 
  • Alaska - $93.37
  • North Dakota - $110.62
  • Wyoming - $103.73
  • Utah - $103.31
  • South Dakota - $113.38
A few observations:
  • State residents in all five Sinkhole states get less than the national value for their $100, with some of them getting far less than $100 worth.
  • Four out of five states in the Sunshine states get more than the national value for their $100, with some of them getting far more value than the national average.
Now the numbers are getting interesting. Sunshine states, the lower debt burden states, have lower unemployment and get better value for their money than Sinkhole states. Could it be that high debt levels stymie economic growth and well being? Let’s look at another set of numbers.

4) One could make the case that taxation levels would logically be higher in Sunshine states since they must have collected more money in taxes than Sinkhole states in order to keep government debt levels low. However, that would be a very wrong assumption to make if we look at the top state income tax rates in each of the states:

Sinkhole States:
  • Connecticut - 6.7%
  • Illinois - 5.0%
  • New Jersey - 8.97%
  • Massachusetts - 5.2%
  • Hawaii - 11.0%
Sunshine States: 
  • Alaska - 0.0%
  • North Dakota - 3.22%
  • Wyoming - 0.0%
  • Utah - 5.0%
  • South Dakota - 0.0%
A few observations:
  • The top state income tax rates in Sunshine states are at or far below the top state income tax rates in Sinkhole states.
  • Three of the top Sunshine states do not even have a state income tax.
Thus, the exact opposite is true from our hypothesis above: the states with the highest debt burdens have accomplished this even though they also have the highest tax burden. Amazing way to get less value for your money, high tax AND high debt.

The numbers do not lie. It appears that government entities that tax at higher and higher levels run up more debt, have worse economic growth and unemployment numbers and create an economic environment that gets state residents less value for their money.

These state levels results could be used to postulate why the national economy has been so anemic since the recession. The Federal government has incurred record amounts of debt while raising taxes only to see stubbornly high unemployment and a withering of the purchase power of households and Americans.

Maybe the Washington political class should take the advice that the character George Constanza did in a Seinfeld episode where he did the exact opposite of what his instincts told him do. Rather than running up debt and raising taxes, which has accomplished nothing from an economic perspective, why not curb debt and wasteful spending and reduce taxes? The Sunshine state numbers prove that they got it right and the Federal government is nothing more than a pathetic character in a TV sitcom.....or a bigger version of the Sinkhole states.

More depressing numbers tomorrow.

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