Is your state going broke?
- 46 states
- The only four states with a balanced budget
- How to invest
If you live in the United States, odds are, your state government is completely broke. It’s an undeniable fact.
That’s because 46 out of 50 states have budget shortfalls for 2011. That statistic comes from the Center on Budget and Policy Priorities (CBPP) - a group that works “at the federal and state levels on fiscal policy and public programs that affect low- and moderate-income families and individuals.”
As you can see, Arkansas, Montana, North Dakota and Alaska are the only states that will have a balanced budget this year.
Why is that? What makes those four states so special?
The first reason is demographics. There are fewer people, fewer cities, less infrastructure and fewer state employees in these states. Also, these four states tend to be Republican strongholds, so there are fewer entitlement programs, and generally, less popular demand for spending programs.
But those reasons are actually minor in comparison to the second, biggest reason.
You see, all four of these states produce more fossil fuels and resources than they consume.
These four states produce more natural gas, oil, gold, silver, coal, and many other resources than they consume, so they can export these resources to other states and countries. The result is that these states have more than enough money to pay for their budgets.
Some states, like New Jersey, are in the process of cutting spending. Other states, like Illinois, are raising taxes.
The fact is that most states will be forced to enact one or both of these policies in the very near future, or risk the collapse of their government or the default of their debt obligations. Unless you live in Arkansas, Montana, North Dakota or Alaska, you should be fully prepared to pay more taxes, receive fewer services, or both.
The good news: according to the ratings agency Moody’s, “no state will default this year.”
The bad news: Moody’s is among the ratings agency that gave mortgage backed securities among their highest ratings. Clearly, they dropped the ball on rating mortgage securities, but that doesn’t mean they’re wrong now.
But some other folks are saying that states will default this year, most notably Meredith Whitney. According to a story in Bloomberg magazine, she expects 50-100 “significant” defaults this year, totaling into the hundreds of billions of dollars.
The state I live in, Vermont, is currently looking at a budget shortfall of more than $300 million.
That’s a huge number for such a small state. There are only 621,000 people in this state. That means that each Vermonter should expect to pay at least $483 more in state taxes than they did last year.
Some states are in a worst position, but most aren’t doing much better.
So what are the investment implications?
Well, more than anything, I just thought that you might like to know about the likelihood of higher taxes and fewer services.
As I like to say, forewarned is forearmed.
But the other side of the coin is that you might want to consider investing in companies that are actually producing energy, precious metals and other commodities in these states.
Why? Because whatever they’re doing, it’s working. These companies are profitable. Their state governments have balanced budgets, so they’re less likely to get hit with higher taxes, at least in the short term. And just as important, they’re in the resource sector - which is an area I think we can all agree should benefit in a currency crisis.
If you’re interested, you should take a look at a research report on a group of energy companies with property in North Dakota and Montana. Click here to read the full story.
Good investing,
Kevin McElroy
Editor
Resource Prospector
