With the sequester set to provide some sanity to the debt situation, one certainly has to question how the cost reductions (reducing unnecessary spending) would impact each of the fifty states and connected political entities (assuming the sequester goes forward).
Well, here are some of the numbers bond rating agencies are looking at when they evaluate municipal credit ratings of entities that are indirectly linked with the U.S. government.
The first measure is how important federal employment is as a percentage of the total employment within a given geopolitical boundary.
Which area would you guess is highly dependent on federal expenditures?
Not surprisingly, Washington D.C. comes in first, with a whopping 28 percent of workers dependent upon other people’s tax money.
Because Washington D.C. is a large outlier, the graph below excludes it. Which state comes in second? Well, it depends on the year. In calendar year 2012, second place belonged to Hawaii, with 6 percent of its workforce dependent on federal deficit spending, followed by Maryland (6 percent), Alaska (5 percent), and Virginia (5 percent) (please note that the sorting in the following graph is for the entire 1990 to 2012 periods).
Of the federal employment measure, which states have seen increases under President Obama’s tenure? Well, the list doesn’t change much from the overall employment picture, with Maryland, Hawaii, Virginia, New Mexico, and Alabama seeing the largest increase in federal expenditures. Interestingly, there was no evidence that a given state’s majority party political affiliation affected personnel savings (reducing personnel costs) at the federal level.
A second measure used by professional analysts is federal procurement – defense and non-defense – as a percentage of total gross state product. This measure gives somewhat different results, which are given in the following figure.
Overall, this measure of federal exposure risk places the state of Virginia as the riskiest, with about 14 percent of its total state GDP dependent on federal procurement spending. Following Virginia is New Mexico at about 10 percent, with Maryland, Alabama, Connecticut, Missouri, Alaska, Arizona, South Carolina, and Kentucky rounding out the top ten most at risk (please note that the following graph is sorted according to all years instead of just 2012, with green representing the most recent year for which numbers are available).
A third measure used by bond quality evaluators is health care employment as a share of total employment. The graphics of this measure are given below. According to this measure, Rhode Island represents the riskiest state, with about 17 percent of its workforce connected to the health care industry. The other four states among the riskiest health care states are Maine, Pennsylvania, Massachusetts, and West Virginia. Perhaps interestingly, states that went for Obama in 2012 tend to have a higher percentage of employment within their boundaries connected with the health care industry.
Overall, although a given bond rating agency’s rating is more complex than just the three measures mentioned here, the federal exposure risk isn’t that much more complex, and depending upon how the federal sequester issue takes hold, the bond ratings of various will be differentially affected. The states at the top of these lists should be ready for counter arguments regarding any potential downgrades if the sequester goes forward.