Financial State of the States 2015 by Truth in Accounting

[SavingWithBabies]

Truth in Accounting release a report on September 12, 2016 on the financial state of the united states:

Financial State of the States 2015 (pdf)

A brief look into the background of the organization looks like they are legitimate/unbiased (ie Wikipedia).

The report categories each state as a "sunshine" or "sinkhole" state in terms of positive or negative government funding respectively. The top 5 sunshine states:

Nebraska - $3,500 per taxpayer
Utah - $4,800 per taxpayer
Wyoming - $26,400 per taxpayer
North Dakota - $28,400 per taxpayer
Alaska - $52,600 per taxpayer

And bottom 5 sinkhole states:

Massachusetts - $33,300 per taxpayer
Kentucky - $33,700 per taxpayer
Illinois - $45,500 per taxpayer
Connecticut - $49,000 per taxpayer
New Jersey - $59,400 per taxpayer

If you're ERE'ing in the USA, do you think this is useful information and would use it as part of the criteria for your chosen ERE state?

[GandK]

Yes and yes. State debt is definitely on my list of criteria.

[BRUTE]

how does it influence the decision? lower quality of life in states with more debt due to bad roads or something?

[Dragline]

You'd make a more accurate assessment if you just project how you plan to live and analyzed how you would be taxed -- states are wildly different on forms and levels of taxation.

If you look at it carefully, you can see that this information is highly correlated with high tax states anyway, with CA, IL, NJ and NY all near the bottom. So while interesting (like KY), its probably superfluous and essentially "covered" if you analyze your own situation.

[SavingWithBabies]

So in a way, one really doesn't have to be concerned about this in ERE because the state has to make up money but it'll likely have to do that via regular taxes. But in ER, most optimize their income to avoid taxes. So it's just a shell game and those in ER can easily play it and those who can't play it (regular workers) will take up the burden.

But it's something to think about in the accumulation phase. However, if one plans to relocate anyway in the ER phase, it's not really a big deal to move if things become so bad that it impacts accumulation.

Upon rereading, it sounds like I'm implying something in my wording but I don't mean to. I still don't know where to relocate to in ER phase. I suspect things like being close to family are going to out weigh tax optimization.

[GandK]

So while interesting (like KY), its probably superfluous and essentially "covered" if you analyze your own situation.

I am not convinced. This is why.

[jacob]

Example from one of the sinkholes (IL):

IL has a flatrate income tax (5%). From an ERE perspective, this is easy to deal with. Just don't make much money.

However, being an eastern state, it also have high property taxes and because of the past kicking the ball down the road (which is now), property taxes will be going up. What's the consequence of that? Well, if you're an owner, it means that homes will become less valuable while RE taxes will be going up in the long run. The reason is that RE value in the long run is determined by the cost of what the "economy" (meaning consumers) can afford to pay on a paychekc basis ... which is a combination of tax-rate + mortgage cost.

Whereas the short run consequences will be that this effect will be a delayed because the cost will be transferred to renters as the spread between RE value (going down) and RE costs (going up).

If this is too abstract/complex, figure that owners are effectively paying something like a 30yr fixed whereas renters are paying something like a 5/1 ARM.

[The Old Man]

... because the state has to make up money but it'll likely have to do that via regular taxes.

US States are not national governments with their own currency. US States have gone bankrupt in the past. The USA national government is not obligated to guarantee the states' debt. There can come a point when the interest payments exceeds the ability of the state to pay and then it defaults. While this scenario is playing out the government services (roads, schools, fire protection, police, etc.) will break down. This mainly makes a difference when you are betting on the long term -> property ownership.

[BRUTE]

so.. not exactly a state, but what ended up happening to Puerto Rico?

[SavingWithBabies]

I am not convinced. This is why.

I want to be convinced too but I'm not. I grew up in Chicago and part of me loves that city. But I left a little over two years ago to try the SF Bay Area. When I left, I was paying $925/month for a 2 bedroom in an unpopular neighborhood. My parents were and are paying more than that per month in real estate taxes for the ugly house on the block that they bought back in the 70s. Sure, it's a very desirable neighborhood now.

The politicians who maybe over promised on those pensions decades ago are long gone. As are most of the politicians since then that have repeatedly borrowed funds destined for that pension obligation. I want to believe they can tax their way out of it and that they new tax funds would actually go to those obligations.

[GandK]

so.. not exactly a state, but what ended up happening to Puerto Rico?

A mess, it looks like. A fiscal mess rapidly becoming a humanitarian mess.

[cmonkey]

@jacob, IL is now at 3.75% flat tax so even better. They also have some minor deductions/exemptions.

The solution to the RE tax problem -> own less house.

[BRUTE]

so.. not exactly a state, but what ended up happening to Puerto Rico?

A mess, it looks like. A fiscal mess rapidly becoming a humanitarian mess.

damn. it's quite interesting how at this point (has it ever been different? brute isn't sure), most culture's lifestyle is so turbo-charged and leveraged that when nobody will extend them any more credit, they basically devolve into catastrophe and maybe civil war. the ex-lenders or non-lenders are then perceived as the devil because it's "their fault". same thing happened in Greece.

brute finds it somewhat disturbing. on the one hand, these millions of humans living in poverty didn't kick the can down the road for generations, expanding the debt more and more. on the other hand, it's not the lenders' fault that the entire culture of a region is based on borrowed money.

[Kriegsspiel]

so.. not exactly a state, but what ended up happening to Puerto Rico?

A mess, it looks like. A fiscal mess rapidly becoming a humanitarian mess.

damn. it's quite interesting how at this point (has it ever been different? brute isn't sure), most culture's lifestyle is so turbo-charged and leveraged that when nobody will extend them any more credit, they basically devolve into catastrophe and maybe civil war. the ex-lenders or non-lenders are then perceived as the devil because it's "their fault". same thing happened in Greece.

brute finds it somewhat disturbing. on the one hand, these millions of humans living in poverty didn't kick the can down the road for generations, expanding the debt more and more. on the other hand, it's not the lenders' fault that the entire culture of a region is based on borrowed money.

I think you're right on about most living beyond their means, but regarding places like Greece, Argentina, Puerto Rico, I've come around to think they should be able to default on their debts. Argentina and Greece have done it repeatedly (I don't know about PR), and lenders know it. If not, they can read This Time Is Different, by Rogoff and Reinhart. Lenders should have skin in the game.

I think the proper course of actions is for bondholders of "bad" countries to get bitten, but then not buy bonds from that culture anymore. Without anyone lending them money, "bad" countries would be forced to either be unproductive (and continue being poor) or productive (and gain wealth more sustainably).

[BRUTE]

brute agrees. this prolonging of the inevitable is the bad part. it doesn't actually take thaaaat long to build a solid economy and regain lenders' trust. brute thinks Argentina's new prime minister (president? whatever they call him) is relatively sane, and let the currency free float first day in office. leading to an immediate move from 1:7 to 1:14 or so rate to USD. but better than black market currency trading.

[Dragline]

He also settled pretty much all of Argentina's outstanding debt issues with former creditors. Which allows the country to issue new debt.

Lenders always have skin in the game, whether they acknowledge it or not. It's called "counter-party risk". Debtors sometimes default, and usually the higher the return, the higher the risk. Private entities usually have some form of bankruptcy to resolve defaults, and municipalities in the US can also file for bankruptcy. Public entities often do not, so it gets messy. Those that can print their own currency can always pay and inflate the debt away. Those that don't -- for example, many countries borrowing in dollars or euros -- may have to face some serious consequences. But usually there is some kind of rescheduling and "haircut" because lenders would rather get something rather than nothing. Committees are formed and deals are made.

"This Time is Different" is required reading if you want to understand this -- and why it should not be new or shocking to anyone. Public defaults are also not an indication that the world is ending, but only entering into a temporary chaos for the people most directly involved.

[Kriegsspiel]

how does it influence the decision? lower quality of life in states with more debt due to bad roads or something?

Coming back to the United States though, I'd assume that places with higher debt would have better roads, since that's something they usually go into debt to build. See more here. Places that are fiscally responsible, like Nebraska and Iowa, tear up the asphalt and revert to gravel roads. I'd guess AK, WY, and ND will probably be in the top 5 on this list until their fossil fuels are economically depleted.

It's like Jacob said, the implications are you'd probably get taxed more.