Morningstar Advisor - April/May 2013 - (Page 21)

Investment Briefs States’ Fiscal Health Is Stable, but Cuts Loom Best and Worst in Revenue Growth States with Greatest Year-Over-Year Revenue Growth (Fiscal Year 2012) Economic strength is a critical determinant of credit quality. It is the chief indicator of the revenue-raising capacity of an entity. Generally, states have strong credit ratings because of the sheer size of their economies, which dwarf those of local governments. Economic activity serves as a circuitous indicator of the state’s revenue-generating capacity— business activity yields corporate income tax revenue and employment; employment yields personal income tax revenue and consumption; and consumption yields sales tax revenue and promotes business activity. State Revenue Change (%) Expenditure Change (%) Budgeted Fund Balance as % Expenditures FY2013 Budgeted Fund Balance as % Expenditures North Dakota 47.0 34.6 75.6 89.2 Alaska 35.2 28.7 222.5 225.1 Illinois 17.4 0.3 1.1 1.1 Hawaii 15.4 10.9 5.0 6.1 Texas 12.5 13.4 17.0 34.1 States with Lowest Year-Over-Year Revenue Growth (Fiscal Year 2012) Thus, to look at a state’s credit quality, we directly examine state tax revenues, which are principally composed of personal income tax, corporate income tax, general sales tax, and other taxes. In aggregate, total state tax revenues increased in fiscal 2012. However, the rate of growth has slowed considerably, and the magnitude of growth varies widely between states. As we look ahead to fiscal 2013, we believe that tax revenues will continue to rebound for almost all states but large expenditure pressures persist, leading to modest budgeting for growth. Revenue Change (%) Expenditure Change (%) Budgeted Fund Balance as % Expenditures FY2013 Budgeted Fund Balance as % Expenditures California –3.7 –4.9 –3.3 1.8 New Mexico –4.3 7.2 12.4 12.8 New Jersey Gross domestic product is one of the most relied-upon indicators of economic activity; however, changes in state revenues are not always explained by changes in GDP. Over the past three years, changes in state revenue have been more volatile than those of the overall economy. State tax revenue rose significantly throughout fiscal 2011, even as GDP remained stubbornly stagnant. Meanwhile in 2009 and 2010, declines in total state tax revenue were much more dramatic than the declines in GDP. State –5.0 6.5 1.9 2.1 New Hampshire –6.1 –5.4 1.9 2.9 Wyoming –6.4 0.0 47.6 47.2 Sources: U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue; National Association of State Budget Officers, Fiscal Survey of States Year-Over-Year Quarterly Change in Total State Taxes vs. GDP % GDP Change State Tax Revenue Change 15 10 5 0 –5 –10 –15 –20 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Source: U.S. Census Bureau, Quarterly Summary of State and Local Government Tax Revenue; Bureau of Economic Analysis, Gross Domestic Product 2012 Review For the fiscal year beginning on July 1, 2011 and ending June 30, 2012, all but five states saw MorningstarAdvisor.com 21 http://www.MorningstarAdvisor.com

Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013

Morningstar Advisor - April/May 2013
Contents
Contributors
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot

Morningstar Advisor - April/May 2013