Don’t buy a house in a state where private sector workers are outnumbered by folks dependent on government. Thinking about buying a house, or a municipal bond? Be careful where you put your capital. Don’t put it in a state at high risk of a fiscal tailspin.
Eleven states make our list of danger spots for investors. They can look forward to a rising tax burden, deteriorating state finances and an exodus of employers. The list includes California, New York, Illinois and Ohio, along with some smaller states like New Mexico and Hawaii.
If your career takes you to Los Angeles or Chicago, don’t buy a house, Rent. If you have money in municipal bonds, clean up the portfolio. Sell holdings from the sick states and reinvest where you’re less likely to get clipped. Nebraska and Virginia are unlikely to give their bondholders a Greek haircut. California and New York are comparatively risky.
Two factors determine whether a state makes this elite list of fiscal hellholes. The first is whether it has more takers than makers. A taker is someone who draws money from the government, as an employee, pensioner or welfare recipient. A maker is someone gainfully employed in the private sector.
Let us give those takers the benefit of our sympathy and assume that every single one of them is a deserving soul. This person is either genuinely needy or a dedicated public servant or the recipient of a well-earned pension.
But what happens when these needy types outnumber the providers? Taxes get too high. Prosperous citizens decamp. Employers decamp. That just makes matters worse for the taxpayers left behind.
Let’s say you are a software entrepreneur with 100 on your payroll. If you stay in San Francisco, your crew will support 139 takers. In Texas, they would support only 82. Austin looks very attractive.
Ranked on the taker/maker ratio, is our 11 death spiral states range from New Mexico, with 1.53 takers for every maker, down to Ohio, with a 1-to-1 ratio.
The taker count is the number of state and local government workers plus the number of people on Medicaid plus 1 for each $100,000 of unfunded pension liabilities. Sources: the Bureau of Labor Statistics, the Kaiser Commission on Medicaid and a study of state worker pensions done in 2009 by two academics, Joshua Rauh and Rovert Novy-Marx. Professor Rauh estimates that the shortage in pension funding is on average a third higher today.
The second element in the death spiral list is a scorecard of state credit-worthiness done by Conning & Co., a money manager known for its measures of risk in insurance company portfolios. Conning’s analysis focuses more on dollars than body counts. Its formula downgrades states for large debts, an uncompetitive business climate, weak home prices and bad trends in employment.
Conning rates North Dakota the safest state to lend money to, Connecticut the most hazardous. A state qualifies for the Forbes death spiral list if its taker/maker ratio exceeds 1.0 and it resides in the bottom half of Conning’s ranking.
It’s easy to see how California got on our list. It has pampered a large army of civil servants while using every imaginable trick to chase private-sector jobs away, the latest being a quixotic scheme to reduce the globe’s atmospheric carbon. A City Journal essay by Victor Davis Hanson notes that the state spends $10 billion a year on entitlements for illegal aliens.
Illinois is especially known for its dishonesty, whether among officeholders (future license plate motto: Land of Corruption) or in the habit of under-accounting for promises to government employees. The Rauh study counted $66 billion in the till to cover pension obligations of $233 billion
The battleground state has a fiscal standoff between takers (people collecting welfare, a government salary or a government pension) and makers (private sector employees). In photo: Cleveland. Story. To lend money to California, Illinois or the other nine states perched on the precipice requires a leap of faith. So does buying a house in those locales. Don’t count on a property tax limit to protect your home’s value. If other taxes are high enough, there won’t be any buyers. DAMIAN SCOT