Media
coverage of the oil spill’s effect on the Gulf focusing on tourist income
lost by the waterfront towns – with footage of empty beaches,
restaurants and T-shirt shops – dominates the news. Interviews with
devastated business owners are heart rending. But they always end with
references to somehow hanging on until “things get back to
normal.”
Trouble
is, things are not going to “normalize.” Not for the Panhandle of
Florida, and probably not for the rest of the state, either.
Projections
suggest that Florida can expect oil all along its west coast, and possibly
throughout the Keys and up the east coast as well. Yet even before BP’s
well began spewing crude, pressures within the state’s economy were
building. It was an explosive situation awaiting a match.
Oily
beaches and dying wildlife are likely that match.
Take
unemployment. Statewide, it ballooned from 3% in 2006 to a peak of 12.3% in
February 2010. Though it’s backed off, it remains in double-digit
territory at 11.2%. ”Officially” – though official numbers
understate the problem. Illegal immigrants, some 4.5% of Florida’s
population, aren’t counted; the long-term unemployed and aging workers
are regularly purged, even if they’re still looking for work.
This
in a state already confronted with the worst of the coming
healthcare/taxation crunch. It has the second oldest population in the
nation, and as its citizens retire, their earnings fall off, causing tax
revenues to drop. At the same time, healthcare bills rise, stressing social
service budgets.
Florida
is ground zero for Baby Boomer demographics. With 600 seniors for every 1,000
workers now, and the number trending inexorably higher, soon every employed
person in the state will essentially have to adopt one senior to care for out
of his or her paycheck.
Housing?
Naturally, rising unemployment amplifies the difficulties of maintaining
homeownership. With further negative effects from the oil, we can only expect
the situation to worsen. A tsunami of defaults and foreclosures – and
bank failures – would not be a surprise.
Florida
is mortgaged to the hilt. It ranks second only to California in total
securitized non-agency mortgage loans, 10% of the national total. Of those,
half are 60 days or more delinquent, or 16% of all such mortgage
delinquencies in the country, the highest ratio anywhere.
The
state is full of retirees trying to live on modest incomes while hanging on
to their homes. Unsurprisingly, this has led to a disproportionate amount of
at-risk loans. 85% of the statewide pool is rated Alt-A or Subprime.
Nor
has the crash in prices bypassed the Sunshine State. Nationally, fewer than
30% of houses sold for a loss in the past year, compared to nearly 50% in
Miami and 65% in Orlando.
Many
would-be sellers are clinging to the cliff edge by their fingernails.
Overall, 81% of all Florida loans are under water, with the average
mark-to-market loan-to-value ratio standing at 138%. Almost 40% of borrowers
are crushed beneath debt of more than 150% of the value of their homes.
State
government is no better off.
As
the oil cuts into employment prospects, tax revenues will nosedive –
and even before the blowout, the state was broke. The projected budget
shortfall for fiscal year 2011 was $4.7 billion. What it will actually be is
anyone’s guess – a bigger number is baked in the cake – but
at $4.7 billion, it already represented more than 22% of the FY10 budget.
Both
tax hikes and service cuts are political suicide. And desperately raising
taxes in a depressed economy tends to decrease revenue, anyway. Yet a balanced budget is mandated by law.
Where will the additional money and/or savings come from?
Then
there’s Florida’s $113.8 billion public pension fund. It must
generate earnings of 7.75% per year to meet its commitments to the nearly one
million public employees and retirees who depend on it.
What
investment safely yields 7.75% today? Nothing. So the fund’s
administrators are asking for permission to try some “riskier”
investments. Maybe they’ll succeed. Or maybe they’ll wind up
staring down the barrel of a pensioners riot.
Florida’s
coming problems are intractable, at best; the least bit of bad luck and they
may become utterly irresolvable.
Expect
bailouts. Washington will not be able to ignore what happens to this
beleaguered state. The federal government will be forced to spend yet more
vast sums of money that it doesn’t have, on a recovery that will take
years, if it ever happens.
And
that makes Florida’s plight a looming horror for us all.
Doug Hornig
Senior
Editor, Casey Research
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