(August 2012) California did something very interesting, and potentially very smart, when they released last year’s proposed budget. They broke out the impact of Facebook’s IPO on state revenues. As the majority of Facebook’s employees are based in California, the state expected a windfall from employees (and Mark Zuckerberg) cashing in their shares. California has the highest state taxes, with high-income earners paying 10.33% (which applies to both ordinary income and capital gains). As a result of the Facebook IPO, the budget projected a windfall to the state of $1.9 billion dollars in fiscal 2013.
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By breaking out the impact of the Facebook IPO, California was able to generate an enormous amount of media coverage. The Facebook story also became a California story. Without spending a dime, the state was able to put forth the idea that California was a great place for starting a business. After all, the greatest start-up of the decade had grown up (although it was not started there) in California. However, Facebook has struggled lately, with its stock falling upper $30 range in May, to the low $20s in early August. This has implications for California as its projected budget windfall was based on a share price of $35. As California is struggling to deal with a huge budget gap, the theme of the story is now about Facebook contributing to the budget problems, rather than helping.
On August 6th 2012, Moody’s Credit Outlook contained a report titled, “California Risks Losing Hundreds of Millions of Dollars from Facebook’s Plunging Share Price”. Following this report, many publications including The Wall Street Journal and the Sacramento Bee have published articles about the connection between the price of Facebook shares and California’s budget problems.
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However, I would like to highlight one important fact:
The budget for California’s general fund is estimated to be $91.5 billion dollars. Assuming that Facebook related income taxes bring in half as much as originally estimated, the one-time impact on the budget will be less than 1 percent of the budget. While I won’t say this a non-story, its not a major one.
What market prices should investors in municipal bonds be watching?
FB is not going to make or break California’s budget. However, I wondered if there were any states where the market price of a particular stock or commodity might be very important in terms of a state’s economic health. The first answer that came to mind was the price of oil to Alaska. However, as you can see from the chart below, I discovered that oil production in Alaska has been in decline for many years.
On the other hand, North Dakota has been rapidly increasing oil production. In fact, it recently surpassed Alaska as the number 2 (behind Texas) oil producing state.
As a result of oil production, North Dakota had the highest growth state GDP (GSP) in 2011 at 7.6%. On the back of oil production, the state economy is doing well. However, a major change in the price of oil (which has been trading in $75 – $95 per barrel (WTI)) would have a much larger impact on North Dakota than the gyrations of Facebook shares on California. On the hand, the state of North Dakota has less than $10 billion or so of debt compared to hundreds of billions for California.
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