Remember that THE STOCK MARKET IS GOING TO CRASH report we mentioned last night?
Well the funny thing is that the report, from Strategas Research Partners, is actually fairly bullish on one of the biggest danger spots for the economy: state budgets.
First of all, they note that tax receipts are coming way back up, which obviously removes a significant amount of pressure.
And then beyond that:
Last week we showed the state and local budget situation has improved significantly in 2010 with state and local governments holding an aggregate $50bn surplus in their operating budgets (3Q, SAAR). The most common kickback we get from clients is that once the federal aid fades in 2011, the situation will deteriorate again. Some clients have gone one step further and suggested the forward looking CDS market sees this aid loss as a major impediment and is pricing in trouble (even before the unfunded liabilities problems hit). But the facts don’t bear this out. We are often told that state and local governments will lose $135bn of aid starting in 2011. This explains the confusion – $135bn was allocated for more than two years of aid but has been running at a $60bn annualized rate ($40bn at the state level, $20bn at the local level). But even this is overstated as new aid was extended through the first half of 2011. In sum, states will lose $20bn in the second half of CY 2011 (i.e. one year from now). After cutting spending by $75bn over the past two years, and with tax revenues now growing, states are earning their way through the loss of federal aid. For frame of reference, the federal government provided state governments $30bn of discretionary aid in 2003 and there was no indication that the loss of federal aid hurt the states. A growing economy helped states earn through the loss of aid, just as is the case now.
We removed all federal aid from state and local budgets to test their stand alone fiscal situation. Interestingly, states are in no worse condition today than they were in the last recession, despite more severe economic conditions. In fact, state and local budget deficits excluding federal aid have steadily declined since ’09 Q2.
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