California’s budget deficit may be one of those missing bathing suits, in need of an accommodating haberdasher in the White House. Other states may follow. Some claim that the problem is a revenue shortfall resulting from a recessionary low tide. But other analysts point to a structural deficit problem that is widely shared if not yet widely acknowledged. One root cause of the structural problem stems from the pension obligations to state and local public employees. A few communities have turned to a special provision of the bankruptcy code to abandon, or at least reduce, these pension benefits. More likely, taxpayers will be asked to cover the shortfall – including through state and local taxes and fees.
For investors choosing among US locations, especially those putting substantial capital into fixed assets or gathering a talent pool that is not easily relocated, a factor that may find itself on a growing number of checklists is local economic risk. Companies are used to considering these factors in emerging or politically unstable markets. Now, more consider what will drive increases in business taxes, fees and costs as well as taxes for their employees among the US states. In addition to state and local tax rates, specific items for companies to compare will include: the strength of public employee unions; use of defined benefit rather than defined contribution retirement plans for public employees; public employee unfunded pension obligations; and public employee headcount increases.
There may be federal relief for some states in the near term – if we can help banks and car companies, why not states? But, longer term, there may not be political capital to support this course of action. Let the locator beware.
Daniel Malachuk works with business and government leaders on global direct investment strategies. He has advised many of the world’s leading companies and served in the public sector as director of White House operations.