June 17, 2010
Site Seekers Beware

A serious financial storm is brewing in a handful of states which could diminish their desirability as locations for future industrial development. Companies planning new distribution centers or manufacturing plants take note: significant increases in taxes and fees could await you.

In 2008 states had a collective pension and health care liability of $3.35 trillion, but only $2.35 trillion on hand to fund them. Given the orgy of state spending since 2008 and declining stock market performance, the funding gap is probably larger than $1 trillion now.

[Place cursor over chart to enlarge]
[Place cursor over chart to enlarge]

The Pew Center on the States rated the performance of each state relative to the percent of pension obligations funded, relationship between their unfunded liabilities and covered payroll, and the share of
actuarially required contributions made in the past five years. The map above shows the ranking, highlighting the 17 states with the poorest performance, those Pew labels as "serious concerns."

Expect these states to be whipsawed by poor investment performance, aging workers, union opposition to changes in current pension structure and payouts, declining tax receipts, growing government payrolls, and lower bond ratings that increase the cost of borrowing.

As if that weren't enough, an analysis of state budgets from the National Conference of State Legislatures highlights four states that could be in serious trouble relative to the pension issue specifically, as well as in broader financial terms. The accompanying map illustrates the FY 2010 budget gap as a percentage of each state's general fund budget. There are 14 states with a gap in excess of 20%, but four of these states also have major problems with pension and health care funding. Connecticut, New Jersey, Nevada and Illinois are rated poorly in both analyses.
New Jersey Governor Chris Christie has encountered stiff headwinds as he tries to reign in spending. Expect similar resistance in the other three heavily unionized states, with pressure to increase taxes and cut services.