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Do you live in a “death spiral” state? Californians take note

Monday, December 10, 2012

What is a “death spiral state”?  If you live in the largest state on the West Coast, I think you know the answer.  The Forbes article below uses objective criteria to establish rankings — with the idea of suggesting that folks should not buy homes or municipal bonds in the declining states.
The comparison uses two criteria.  One is the standard mish-mash of economic factors we have all come to expect — factors covered in my dreary “Breaking Bad” fact sheet comparing CA with the other states. “[It] 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.
But the other criterion is more interesting.  It’s a ratio of takers to payers.  It does not count federal employees, as they are not paid by state or local governments.
Who is a taker?  As defined in the study, “a taker is someone who draws money from the government, as an employee, pensioner or welfare recipient. A payer is someone gainfully employed in the private sector.” Of course, come election time, this ratio becomes all too important.

A state that has more takers than payers is a “death spiral” state.  Sadly, California “excels” in such comparisons.

The good news is that California is not the worst state in this criterion. The bad news is that we are the third worst state.  Unfortunately the fourth worst state is WAY behind us.

Oddly enough, New Mexico is the worst.  Mississippi is second.

Among the eleven death spiral states, eight have a ratio of takers to payers of 1.0 to 1.1.  A “1.10″ ratio would mean that the state has 10% more takers than payers.  When we go to the next/third worst state (California), the ratio soars to 1.39 — for every 100 people working in the private sector, 139 are largely or totally dependent on government for income.
Yup. Death spiral.

Californians should take some solace from this: With Mississippi’s ratio at 1.49 and New Mexico at 1.53, we won’t be overtaking these “leaders” anytime soon.  Oh joy!

Here’s what the article has to say about California:  “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.”
Our California death spiral is exacerbated by the “net domestic out-migration” that saw 1.5 million more Californians leave the state in the last decade.  I say again — NET migration.

Naturally the “takers” stay in (and are attracted to) the Golden State, while too many payers are moving elsewhere for better opportunities.

Did I mention “death spiral”?

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11/25/2012 @ 8:13AM |194,035 views
Do You Live In A Death Spiral State?
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.
. . .
To read the rest of the article and to review the death spiral states, go to the link:
http://www.forbes.com/sites/baldwin/2012/11/25/do-you-live-in-a-death-spiral-state/
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