5 posts from June 2011

Gambling on a recovery

The economy has been slow to recover from the recession, and state budgets have suffered as a result (see June 22 Roundup post). But one area that hasn’t been hit particularly hard is state gambling revenue.

According to a late June report from the Nelson A. Rockefeller Institute of Government, state and local gambling revenues from lotteries, state-owned casinos and other gambling venues increased by 2 percent nationwide last year. That counterbalanced a 2.5 percent decrease in 2009, which was the first drop since at least 1998, when the organization started tracking these data.

Across the country, states receive about 2.4 percent of their revenue from state gambling sources. However, that figure is much smaller in Ninth District states (in fact, when rounded, Montana and North Dakota receive 0 percent of their state revenue from gambling). This is because district states have fewer state-based gambling options—most importantly, they have very little parimutuel betting, which is a big revenue generator in states like California, New York and Florida. (This report does not include Indian casinos, and any related payments to host states, because gambling revenues from individual tribes and bands are generally not available.)

The gambling-revenue whale in Ninth District states is the lottery; it represents about 99 percent of state gambling revenue in Minnesota and Wisconsin, and about 88 percent in South Dakota; each state brings in between $120 million and $144 million. (Combined, Montana and North Dakota coffers receive less than $20 million from state-sanctioned gambling.)

Every district state saw a small dip in lottery revenues in either 2009 or 2010. Wisconsin saw a particularly large dip (8 percent) in 2009 lottery revenue, but posted an 11 percent gain last year. Still, total gambling revenues in district states last year topped 2008 levels, which the rest of the country had not yet achieved.

Gambling chart -- 6-27-11 

It also appears that state lotteries are increasing their popularity with residents faster than their revenues to states. The most recent annual report by the Minnesota State Lottery also shows that total sales (before expenses) rose each year from 2006 to 2010, growing a total of 18 percent.

Still a (budget) hole, but getting slowly shallower

States continue to scramble to balance their budgets. Revenues have been ticking higher, but some district states are still in a budgetary funk.

The National Conference of State Legislatures (NCSL) recently released a report that looked at current and projected state budgets several years out for all 50 states and Puerto Rico, based on data collected from legislative fiscal directors in March 2011.

State lawmakers faced budget gaps totaling $84 billion in fiscal year 2011, and another $10 billion or so showed up afterward as either tax revenue or costs failed to meet projections. Though huge, it nonetheless represented a 50 percent drop in cumulative state budget deficits from 2010, at $174 billion.

State budgets in 31 states and Puerto Rico find themselves with a deficit totaling $86 billion for FY2012. While that might not seem like an improvement, the coming fiscal year is the first in several that includes very little or no federal stimulus funds. In each of the past two fiscal years, states received about $60 billion or more to help close budget deficits. Major improvements are projected for 2013, when budget gaps are expected to fall to $31 billion among 19 states—less than half of what state budget officials predicted just four months earlier.

Among district states, there is good news and not-so-good news. Minnesota and Wisconsin are in the process of filling budget holes of $5 billion and $3.6 billion, respectively, for the coming 2012-13 biennium. In Minnesota’s case, that’s an improvement of about $1 billion since an earlier November forecast, but it still represents about 14 percent of the state’s general fund.

In March, South Dakota was the first state in the nation to approve its 2012 budget, closing a $127 million deficit with cuts to government agencies, Medicaid and education. Nineteen states did not report a budget gap for 2012, including Montana and North Dakota.

Deficits have resulted mostly from a decline in tax and other revenues; expenditures are politically more difficult to cut in the short term, which creates structural budget imbalances that are often dealt with through temporary spending cuts, accounting maneuvers and other short-term fixes. That’s also why budget deficits will linger in states like Minnesota and Wisconsin (see table) unless structural reforms are enacted that better balance future revenues and expenditures. Without structural budget reform, the only hope of not running into annual budget deficits is for the economy (and tax receipts) to grow.

State budget outlook -- 6-22-11 

Almost 85 percent of U.S. states saw peak revenues in 2008, including every district state, save for North Dakota, which happens to be the only state that has not experienced a decline in tax collections on a year-over-year basis since the recession began. Wisconsin expects to surpass its peak 2008 revenue in 2012, while Minnesota budget officials predict it will clear that bar one fiscal year later. South Dakota’s general fund receipts have dropped only slightly since 2008—hovering within $25 million of the state’s revenue peak that year of $1.16 billion, including its projections for 2012. It has not made estimates beyond that date.

Montana is one of just two states (New Mexico being the other) that doesn’t expect general fund collections to find their new peak until FY2015, though the NCSL report noted that outlook could change depending on oil production from the Bakken formation on the state’s eastern edge.

State credit ratings holding up, and then some

At a time of high public debt and debate over federal debt ceilings, one might think that public credit ratings have suffered in the process. Standard & Poor’s recently issued a warning to the U.S. government that it risked a credit downgrade if it could not get its fiscal house in order.

Yet despite lingering budget deficits for many states, credit ratings for district states have either improved or merely remained strong over the past few years. Historical credit ratings from Moody’s, compiled on all states by the Federal Reserve Bank of Philadelphia from public files, show that state credit ratings on general obligation bond debt don’t change much over time (see chart).

Moody's municipal credit ratings 6-14-11 

While district states don’t have perfect credit ratings, it helps put recent fiscal difficulties into some context. North Dakota only started receiving a credit rating in 2000, and at a comparatively timid Aa3 (or seven on a credit scale of 10). But it has been rising of late thanks to the strength of that state’s economy and the underlying revenue flow to the state government.

Minnesota is the only state of the four that sits at a lower credit rating than a decade earlier, but it nonetheless has the highest absolute rating of the group. Despite repeated budget deficits over the past half decade, Wisconsin general obligation debt was upgraded last year.

Ranked among all states, district states sit in the middle of the pack. No district states received the highest AAA ratings, while nine states nationwide have that distinction. But neither were district states among the 14 receiving an Aa3 rating or lower. The two lowest-ranked states are Illinois (at A2) and California at the bottom with Baa1, only a few short ticks from junk status. Three states, including South Dakota, issue no general obligation debt, and thus receive no rating.

A wealth of flooding: A view from economics

Even if you don’t live in the Dakotas or Montana, you’re likely familiar with the vast flooding that has occurred over the past weeks, with still more to come as deep snowpack in Montana mountains melts and hits already-bloated rivers and streams, much of it eventually heading east via the Missouri River into the similarly soaked Dakotas.

The flooding is so widespread that it can be hard to get your hands around the economic impact of flooding. Over the coming months, the Federal Reserve Bank of Minneapolis will be attempting to do just that. In the meantime, it’s useful to tack up some theoretical background behind the immediacy of flooded communities and farmland across the western portion of the Ninth District.

Economists generally recognize four discrete economic stages related to flooding and other disasters; each has to do with either preparation for or recovery after a disaster. The first stage is the use of available but scarce resources to protect wealth. For example, public and private entities have created insurance products, and households and businesses buy these products to protect their assets.

Governments, businesses and households also spend resources to build temporary defenses against floods—river dikes, houses with raised living floors—and they expend additional funds planning for floods and keeping close tabs on the possibility of flood by monitoring and predicting water levels. Such expenses represent an opportunity cost because this money could have been spent on other needs, or saved. But the resources spent are perceived to be small in the context of potential damage and loss of wealth caused by a disaster. The efficacy of such spending (and for whom) depends on the frequency of disasters, as well as who pays for—and benefits from—the protection.

The second stage is the destruction of wealth. The opportunity cost of protecting all assets against disasters is extremely high—if that weren’t the case, there would be no such things as disasters. Instead we’d merely call them unique weather events because there would be no economic loss to justify the label of disaster. And when assets go unprotected, there is the prospect of loss from a variety of events, natural and otherwise.

The third stage is rebuilding wealth, which often has the look and feel of economic expansion as governments, businesses and households spend significant resources to rebuild. This new activity increases economic output, but it only replaces the wealth that has been destroyed. Economists call this the broken window fallacy because despite the buzz of activity, society's net wealth is lower after disasters. 

The final economic stage is the evaluation of past practices and the development of new strategies for protecting wealth—the lessons learned, if you will. This evaluation of past protection efforts extends to government, businesses and individuals.

These phases can be seen in any disaster. The current one unfolding in the Dakotas and Montana is only in the second phase in most places, as the floods are still exacting their toll on private and public buildings, farmland, infrastructure and other assets. The last epic flood disaster in the Ninth District was in the Red River Valley in 1997, which the fedgazette analyzed near its 10-year anniversary. Go here to read the analysis and see the various stages in play.

In the wake of disaster, an export opportunity

The earthquake and tsunami that struck Japan in March was a calamity that killed over 20,000 people and inflicted billions of dollars in property damage. But for Ninth District exporters, Japan’s misfortune represents an opportunity to expand sales as the country moves into full recovery mode.

It’s unclear which district states stand to gain the most from the rebuilding effort; some states may see shipments shrink because their chief exports are not those most needed to restore Japan’s shattered northeast coastline. But a fedgazette analysis of trade statistics shows that some states have a larger stake in Japan’s recovery than others.

Minnesota and Wisconsin have by far the district’s biggest state economies, so it’s not surprising that these states are the region’s biggest exporters to Japan, measured by the value of the five largest exporting industries. Minnesota sales to Japan—primarily computer and electronic products, manufactured commodities and non-electrical machinery—totaled $930 million last year. Wisconsin wasn’t far behind on the strength of large shipments of food, chemicals and transportation equipment (see Chart 1).

Exports to Japan CH1 -- 6-3-11 

In contrast, exports to Japan from other district states were relatively paltry: North Dakota companies shipped just $9 million in goods—mostly non-electrical machinery and food products.

However, when you look at Japan’s share of total manufactured exports from each state (Chart 2), Montana is the district leader, with almost 10 percent of exports going to the island nation. In other states shipments to Japan accounted for less than 6 percent of overall manufactured exports.

Exports to Japan CH2 -- 6-3-11 

Trade figures for past years show that Montana’s exports to Japan have grown at an average annual pace of almost 9 percent since the 1990s—a surge that state trade officials attribute to a shift in focus from commodities to value-added products such as breakfast cereals, pasta, precious metals and polysilicon (used to make solar panels).

The value of exports from district states varies widely from year to year, based on factors such as currency exchange rates and demand from specific industries. Last year was a good one for exports to Japan—districtwide shipments rose 16 percent from 2009 to 2010, partly because the yen gained strength against the U.S. dollar. For more on trends in Ninth District exports, see the July issue of fedgazette.

Associate Economist Rob Grunewald and Research Assistant Brian Holte contributed to this report.