“Do You Live In A Death Spiral State?”

That’s the question: William Baldwin asks: and if the answer is “yes,” it might be time to start thinking about your options.

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.

…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.

…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.

The states on the list?

Ohio (1.0)
Hawaii (1.02)
Illinois (1.03)
Kentucky (1.05)
South Carolina (1.06)
New York (1.07)
Maine (1.07)
Alabama (1.10)
California (1.39)
Mississippi (1.49)
New Mexico (1.53)

One thing too many people have lost sight of in modern America is that all the wonderful things we have in this country are paid for by past, present or future productivity. Either we’ve earned it, we’re earning it or people will give us money because they believe we’ll earn it. Not every non-productive person is lazy, bad or looking to leech off everyone else, but his bills still have to be paid for by someone’s productivity. If it’s not his own past productivity or future productivity, then some other productive person has to pick up his slack. Assuming that there will always be enough producers to take care of the non-producers, no matter how numerous they become, is an extraordinarily dangerous assumption that many states seem determined to test. It would be wise not to have too much of your future riding on what may very well turn out to be a losing bet.

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