Rebel Traders – Analysis Without The Hype

Los Angeles – You have been downgraded

The last holdout of the financial ratings agencies, Standard & Poor’s in this case, has brought down the hammer on the city of Los Angeles and downgraded the credit rating of the city.

[…] City Administrative Officer Miguel Santana said Standard & Poor’s downgrade stemmed from its concerns about the significant drop in tax revenues and the city’s plans to draw on its reserve fund to end the year in the black.
Though Standard & Poor’s acknowledged that the city had taken steps to close its budget gap — including last week’s authorization to eliminate 4,000 city workers to save as much as $300 million next fiscal year. But analysts continue to be concerned about the city’s structural deficit. […] (LA Times)

Falling tax revenues, a problem being experienced throughout the nation which will result in more cities, big and small, facing the same situation, perhaps even having to resort to bankruptcy which the city of Harrisburg PA is considering.

As is many other states across the country. A topic I have spoken of on a number of occasions is the declining tax revenues that will continue to suffer and will lead to the next wave of unemployment (spoiler alert – this is a topic in my 2010 predictions).

Consider the following from the Pittsburg Times

Pennsylvania state tax revenue fell in comparison to last year, largely due to its residents earning and spending less, according to third-quarter data released Tuesday by the U.S. Census Bureau.

The Quarterly Summary of State and Local Tax Revenue reported Pennsylvania had third-quarter tax revenue of $6.64 billion, down 6 percent from $7.09 billion in the third quarter of 2008. Year-to-date, Pennsylvania tax revenue totaled $23.08 billion in 2009, down 9 percent from $25.24 billion in 2008.

A vast majority of the drop can be attributed to Pennsylvania residents making less money and, in turn, spending less. The two largest classifications of taxes — general sales and gross receipts, (which declined 7 percent for the quarter and year-over-year), and individual income tax revenue, (which declined 9 percent from the quarter and 14 percent year-over-year), account for three-quarters of the drop in state tax revenue. The drop in general sales and gross receipts for the first three quarters of the year totaled $475 million, and the drop in individual income tax revenue totaled $1.15 billion.

Corporate net income tax revenue was down 11 percent in the quarter and 22 percent year-over-year. This tax brought in about $347 million in the third quarter of 2009, down from $390 million in the prior year quarter. Year-to-date, the tax brought in $1.33 billion in 2009 compared to $1.7 billion in 2008.

The category of corporations in general brought in about $69.4 million in the third quarter, down 58 percent from $164 million in the prior year quarter. For the year, this category brought in $433 million through three quarters of 2009, down 33 percent from the $646 million the tax delivered in the first three quarters of 2008. [...]

[...]Other than revenue from licenses, few categories brought in more tax revenue in 2009 than in 2008. One exception was alcoholic beverage tax revenue, which was up 12 percent in the quarter and 9 percent year-over-year. [...]

Watch for 2010 to include more layoffs from local, county, and state government agencies and departments. There will be one of two ways to correct the significant decline in tax revenues going forward. Increase taxes or layoff more workers. Either one is a blow to the economy.

You see, the green shoots that so many were calling as signs of sustainable growth did not turn out to be perennials, instead they were just short term annuals, and many of them have already died off.

What happens when tax revenues continue to fall due to the worsening employment situation? You don’t have enough money to run your town, city, or even the state is what happens.

New York Governor David Paterson told his legislature tonight that the state has only 4 and 1/2 weeks of money left.

[...]“We’re going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations,” Paterson said.

And so began what is turning out to be a tense tug of war between Gov. Paterson and the Legislature.

The governor says $3.2 billion in cuts must be enacted how — or else. The cuts range from $500 million in agency spending to over $1 billion in already committed in aid to school districts and hospitals.

“I will mortgage my political career, but I will not mortgage the fate of the State of New York,” Paterson said.

But Senate Democrats, with their tenuous 32-30 hold on the upper house, are terrified to make school and hospital cuts because, they said, the cuts could mean increases in local property taxes.

And that could mean suburban Democrats on Long Island, in Westchester and other parts of the state could have trouble getting re-elected next year.[...] (source: CBS 2 New York)

For heavens sake, don’t try to balance the budget by making tough decisions or you just may lose elections. Is winning elections really that more important than finding a workable solution to the budget problems? I guess it is and so now you know part of the reason why it is we continue to have this nightmare economy.

As State and Local Government tax revenues continue to decline it was only a matter of time before we see stories like this become a reality.

To say that Cairo, the seat of Alexander County, Ill., has seen better days is a cruel understatement. The county of 8,000 people is half-a-million dollars in the red, and the recession has made a bad situation worse.

Cairo’s police department has just had most of its cruisers repossessed, reports CBS News National Correspondent Dean Reynolds. The recession has reduced tax revenues all over the country, forcing government agencies to cut their budgets. A survey of police departments found 66 percent of them were facing cuts this year.

“God willing, we’re going to protect these people and we’re gonna continue with what we got. We’re used to struggling. We’re used to struggling,” said Sheriff David Barkett with a laugh.

The situation got so bad this month that the bank repossessed five of his seven cruisers. Four of them sit in the bank parking lot now, shorn of their emergency lights, antennas and seals. In addition to losing his cruisers, the sheriff lost three-fourths of his staff, most of them deputies,
to budget cuts. At its peak, the staff had 29 full and part timers. Now there are five.

“I’d say it’s very extreme when it effects the protection of lives and property,” said Barkett. [...] (Source: CBS News) hat tip Butch

The next stage of the recession is now taking hold with tax revenues being hit hard at the state level (and local levels). As tax revenues decline then the state governments (and local governments) are forced with either hiking taxes to make up the loss, or they cut services and employees.

A vicious cycle recessions can be…

State income-tax revenue fell 26% in the first four months of 2009 compared to the same period last year, according to a survey of states by the nonprofit Nelson A. Rockefeller Institute of Government.

The report, conducted by the public-policy research arm of the State University of New York, is one of the most up-to-date measures of how deep the recession is digging into Americans’ wallets and, consequently, state coffers.

States are required by law to balance the budget, so lower tax revenues will translate in service cuts, rather than red ink. Already states such as Kansas are slowing the payment of income-tax refunds and delaying payments to local school districts, according to the report.

Withholdings from the first four months of 2009 were down 6.9% from the same period in 2008, signaling that “many people had a very bad start of the year” with lower salaries and wages, says Don Boyd, a senior fellow at the Rockefeller Institute.

The time span notably includes the April 15 deadline for filing taxes, a critical time for states to collect revenues.[...]

The plunge in income-tax revenue means some states may have to revise budget agreements for 2009-2010 and may still face gaping holes in 2011, when federal stimulus money runs out. (source: WSJ)

Green shoots? I don’t think so…

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, a study released Tuesday by the American Institute for Economic Research says.

When the economy slumps, so does tax revenue, and this recession has been no different, says Kerry Lynch, senior fellow at the AIER and author of the study. “It illustrates how severe the recession has been.”

For example, 6 million people lost jobs in the 12 months ended in April — and that means far fewer dollars from income taxes. Income tax revenue dropped 44% from a year ago.

“These are staggering numbers,” Lynch says.

Big revenue losses mean that the U.S. budget deficit may be larger than predicted this year and in future years.[...]

source: USA Today

TrimTabs reports that income tax withholdings dropped an additional 5.3% y/y in just the last four weeks alone.

Tax receipts are down at the national level all the way down to the local municipalities. Sorry, but this is not a green shoot. More local government spending cuts will mean additional layoffs. I hope you are not ‘long’ retail companies. The retail sector is still the next big disaster in the making in my opinion.

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