State Tax Revenues Likely Decline Record 6th Straight Quarter; Investors not Compensated for Risk on Illinois, California Bonds

The managing director for Pew Center says U.S. States Face �Staggered� Recovery

U.S. states face a �staggered� recovery even as the national economy shows signs of stabilizing, Susan Urahn, a managing director at the Pew Center on the States, told investors on a conference call.

They may also have to contend with three to four more years of budget woes, said Laura LaRosa, director of fixed income at Glenmede Investment & Wealth Management in Philadelphia, on the call yesterday.

�When the recovery comes, it�s going to be staggered and slow,� Urahn said. �The lag happens because it takes time for the states� unemployment rates to come down to pre-recession levels.�

States� personal income-tax revenue fell 7.1 percent in January and February from the same period in 2009, and there is a risk the slide will extend into this quarter, the Nelson A. Rockefeller Institute of Government said in a report yesterday.

Tax revenue likely declined for a record sixth straight quarter in the first three months of the year, the institute�s deputy director, Robert Ward, said in congressional testimony on April 15.

Lawmakers have struggled with three consecutive years of revenue shortage, Urahn said. They closed $117 billion in cumulative budget deficits last year and are estimated by Pew to face $146 billion of gaps this year, she said.

�Given the long-term ramifications of what�s going on, we could be looking at malaise through these state budgets for three to four years,� said LaRosa, who helps manage $4.5 billion in municipal bonds.

Investors in municipal bonds should purchase higher-rated debt and diversify across the states, LaRosa said. Buyers should focus on pre-refunded municipal bonds, a tax-exempt security payable from U.S. Treasuries in escrow that are left in the market after refinancing deals, and callable debt.

Lower-rated states, such as California and Illinois, are not yielding enough to merit the risk of investment, LaRosa said.

Pew thinks it will take 3-4 years before the unemployment rate drops to pre-recession levels. I think it will not happen in a decade.

Civilian Unemployment Rate



Since 1970, very few years have had an unemployment rate under 5%. We may not see that again for decades (with an s). Certainly another internet dotcom boom is out of the question and equally certain this was a once in a multi-generational housing, commercial real estate, and credit boom.

There is no driver for jobs and there is likely to be no driver for jobs for a long time coming. in the 1980's when there was a driver for jobs, it still took nearly a decade for unemployment rate to drop from the recession peak to 5%.

Now people think it will happen in 3-4 years?!

Barring another war, disease, or asteroid that wipes out a huge chunk of the world's population. I just do not think it will happen.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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