State Financing Crisis: Big News, the Stock Market Fell in 2008

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Thursday, 06 January 2011 11:37

Both the New York Times and the Washington Post decided to make major news stories out of a new Census report on state finances for fiscal 2009. Both papers highlighted a reported 30 percent decline in revenue for the year.

While this might sound like a terrifying plunge, the bulk of this reported decline in revenue was attributable to the loss in value of investments held by the states, most importantly stock held by their pension funds. The fact that the stock market fell in the 2009 fiscal year (June 30, 2008 to June 30, 2009 in almost all states) is not exactly news. The S&P 500 fell by 27.9 percent from the end of June, 2008 to the end of June, 2009. 

Furthermore, it would have been worth pointing out that this plunge has been largely reversed. The S&P rose 12 percent during the states' 2010 fiscal year and its most recent close has brought the market almost back to its June 2008 level. In other words, the plunge in revenue that is the highlight of these articles has already been almost completely reversed by the subsequent rise in the stock market.

This does not mean that the states do not still face serious funding shortfalls. Revenue has been hard hit by the recession and stocks still have not provided the return that was anticipated, meaning that pensions do face shortfalls. However, it would have been helpful to readers to point out that the plunge in investment values has been been reversed rather than to highlight this plunge as a major cause for concern.

Hat tip to Gary Burtless.